PUBLIC     FINANCE 


PUBLIC    FINANCE 


C.    F.    BASTABLE,    LL.D. 

PROFESSOR   OF   POLITICAL  ECONOMY   IN   THE   UNI  'ERSITY   OF   DUBLIN 
EXAMINER   IN    THE    UNIVERSITY   OF   LONDON 


'  Finance  is  not  mere  arithmetic  ;  finance  is  a  great  policy.  Without 
sound  finance  no  sound  government  is  possible  ;  without  sound  govern- 
ment no  sound  finance  is  possible."  WILSON 


MACMILLAN    AND    CO. 

AND    NEW    YORK 
i  892 


,50 


HORACE   HART,    PRINTER    TO  THE   UNIVERSITY 


PREFACE 

/ 

THE  subject  of  Public  Finance,  as  distinct  from  that  of 
Political  Economy,  has  not  of  late  years  attracted  much 
attention  in  Great  Britain.  The  very  excellence  of 
English  financial  institutions  and  management  has  con- 
tributed to  this  result  by  making  the  need  of  theoretic 
study  as  a  basis  for  practical  reforms  less  pressing. 
Though  our  financial  literature  is  not  quite  so  poor  as 
some  critics  imagine,  it  must  be  allowed  to  be  deficient 
in  works  dealing  with  the  subject  as  a  whole.  Since  the 
well-known  book  of  McCulloch — first  published  in  1845 
and  now  out  of  print — there  has  been  no  manual  available 
for  the  student. 

Such  a  want  is  specially  felt  in  the  work  of  teaching. 
A  lecturer  who  desires  to  deal  with  financial  questions 
has  no  text-book — like  those  at  the  service  of  his  French, 
German,  and  Italian  colleagues — to  use  as  the  groundwork 
of  his  instruction,  and  is  therefore  compelled  to  make 
constant  reference  to  foreign  treatises  not  readily  accessible 
to,  or  easily  read  by,  his  class. 

In  the  present  work  I  have  sought  to  temporarily  supply 
this  need  by  going  over  the  whole  field  of  Public  Finance 
and  presenting  the  results  in  a  systematic  form,  so  that 
a  student  may  at  least  obtain  a  general  knowledge  of 
the  leading  facts  and  present  position  of  this  branch  of 
political  science.  The  selection  of  topics  and  the  space 


VI  PREFACE. 

assigned  to  each  have  been  determined  under  the  influence 
of  this  guiding  idea,  which  has  led  to  limitation  of  the 
treatment  in  two  respects. 

In  the  first  place,  I  have  not  sought  to  specially  discuss 
matters  of  temporary  or  local  political  interest,  or  to 
decide  on  the  merits  of  the  conflicting  arguments  of  party 
advocates.  For  the  purpose  of  scientific  study  it  is  the 
general  and  permanent  aspects  of  finance  that  most  require 
elucidation.  None  the  less,  however,  do  conditions  that 
underlie  existing  political  controversies  frequently  come 
into  view.  In  every  department  of  Finance  questions  of 
real  and  practical  importance  are  to  be  found.  The 
'  purely  academic  discussion  '  of  to-day  will  be  the  '  burn- 
ing question '  of  a  twelvemonth  hence.  This  explanation 
is  necessary  to  account  for  the  apparently  curt  treatment 
of  certain  prominent  questions — such  as  that  of  compulsory 
insurance  (p.  85) — which  I  had  disposed  of  long. before  the 
present  situation  had  arisen. 

Again,  I  have  not  thought  it  advisable  to  devote  space 
to  discussion  of  the  financial  bearings  of  the  latest  economic 
theories.  Admitting  fully  the  great  ability  and  vigour 
with  which  the  supporters  of  the  Austrian  school  have 
urged  its  claims,  I  feel  that  the  controversy  is  as  yet  un- 
closed and  that  the  complete  acceptance  of  the  new  theory 
seems  at  the  utmost  to  involve  a  translation  rather  than  a 
reconstruction  of  the  older  views  on  Finance,  while  the 
practical  deductions  to  be  drawn  from  it  are  not  at  all 
clear  or  universally  accepted  even  by  its  upholders.  A  full 
examination  of  its  influence  on  Finance  would,  from  both 
the  length  and  the  difficulty  of  the  inquiry,  be  altogether 
unsuited  for  a  work  like  the  present.  Where  necessary — 
as  in  the  case  of  progressive  taxation  (p.  284) — I  have, 
however,  noted  its  bearing. 

In  acknowledging  my  many  and  heavy  obligations  I  feel 


PREFACE.  Vll 

bound  first  to  mention  M.  P.  Leroy  Beaulieu,  whose  Traite 
dc  la  Science  des  Finances  is  probably  the  best-known  and 
most  generally  valued  work  on  the  subject.  It  was  in 
his  full  and  admirably  lucid  treatise  that  I  first  studied 
the  science,  and  I  have  always  used  it  with  pleasure  and 
profit.  Next,  I  would  place  the  elaborate  work  of  Wagner, 
who  supplies  his  readers  alike  with  ingenious,  if  often 
disputable  doctrines,  and  carefully  collected  masses  of 
material.  The  manuals  of  Cohn,  Roscher,  and  (though 
in  a  less  degree)  Stein  I  have  also  found  very  serviceable. 
On  questions  of  administration  and  control  I  owe  most  to 
M.  Stourm's  Le  Budget.  The  same  writer's  Les  Finances 
de  VAncien  Regime  et  de  la  Revolution  threw  most  light 
on  that  important  part  of  French  financial  history. 
I  used  with  advantage  Clamageran's  Histoire  de  I  Impot 
en  France  for  the  earlier  periods.  In  respect  to  England 
Mr.  Dowell's  instructive  and  entertaining  volumes  have, 
been  my  chief  guide.  Besides  the  usual  books  of  reference — 
amongst  which  I  would  specially  name  the  successive  issues 
of  The  Statesman's  Yearbook ',  the  Annuaire  de  £  Economic 
Politique,  The  Statistical  Abstract,  and  The  Victorian 
Yearbook — the  two  Dictionnaires  of  M.  Le"on  Say,  and  the 
works  of  Vignes,  Fournier  de  Flaix,  Alessio,  and  Professor 
Ely  gave  me  most  information  on  existing  conditions. 

In  dealing  with  financial  statistics — which  have  been  kept 
within  the  narrowest  possible  limits — I  have  in  most  cases 
rounded  the  figures  in  order  to  fasten  attention  on  the 
really  important  fa'cts  expressed  by  them.  For  the  same 
reason  in  the  conversion  of  foreign  money  into  English 
I  have  been  satisfied  with  the  approximate  equation  of 
£1  =  $5  =  25  francs  or  lire  =  20  marks.  The  fluctuations 
of  the  rupee,  the  Austrian  florin,  and  the  rouble  have 
generally  made  their  conversion  undesirable,  but  I  have 
sometimes  taken  them  at  their  exchange  value. 


Vlll  PREFACE. 

Finally,  I  should  explain  that  the  references  are,  unless 
where  otherwise  stated,  to  the  volume  and  page  of  the 
particular  author.  In  order  ^to  prevent  any  mistake  I  have 
added  a  list  of  the  chief  works  referred  to  and  the  editions 
used. 

C.  F.  BASTABLE. 

TRINITY  COLLEGE,  DUBLIN. 
May,  1892. 


CONTENTS 

INTRODUCTION. 
PART  I. 

PAGES  / 

§§  1-5.  Nature  and  scope  of  Public  Finance.  §§  6,  7.  Its  relations  to 
economics.  §  8.  To  history  and  statistics.  §  9.  Its  appropriate 
method;  must  combine  induction  and  deduction.  §  20.  Outline 
of  present  work  .......  1-15 

PART  II. 

§  i.  Need  for  studying  the  development  of  financial  theory.  §  2.  Reasons 
for  its  absence  in  ancient  times.  §  3.  And  in  the  Middle  Ages. 
'§  4.  Its  commencement.  Bodin.  §  5.  The  Cameralists — Vauban, 
Montesquieu,  Hume.  §  6.  The  Physiocrats :  their  influence.  §  7. 
Adam  Smith's  Wealth  of  Nations :  its  position  and  merits.  §  8. 
His  English  successors.  Modern  French  writers.  §  9.  The  German 
followers  of  Adam  Smith.  Later  financial  theories  in  Germany. 
§  10.  Italian  writers.  §  1 1.  Recent  English  and  American  works 
on  Finance  .......  15-33 


BOOK  I. 

PUBLIC  EXPENDITURE. 

CHAPTER  I. 
STATE  ECONOMY.     GENERAL  CONSIDERATIONS.  / 

§  i.  Expenditure  necessary  in  all  economies.  §  2.  Peculiarities  of  the 
public  economy.  §  3.  Classification  of  public  wants  by  J.  S.  Mill 
and  Roscher.  §  4.  Theories  of  State  functions.  Paternal  govern- 
ment. Laissez-faire.  Adam  Smith's  statement.  J.  S.  Mill.  Modern 
position.  §  5.  The  development  of  State  functions  in  the  several 
social  stages.  §  6.  Permanence  of  certain  wants.  §  7.  Com- 
modities and  services  both  required  ....  37-53 


X  CONTENTS. 

CHAPTER  II. 
THE  COST  OF  DEFENCE. 

PAGES 

§  i.  Increase  of  expenditure  for  this  object.  §  2.  Partly  in  preparation, 
partly  for  actual  warfare.  §§  3,  4.  Development  of  the  military 
organization.  Its  dependence  on  economic  conditions.  §  5.  Volun- 
teer service.  §  6.  Cost  of  navies.  §  7.  Growing  cost  of  war 
materiel,  possible  alleviations.  §  8.  Cost  of  warfare.  §  9.  Sum- 
mary. Note  .  .  .  .  "  .  •  54-°8 

CHAPTER  III. 
JUSTICE  AND  SECURITY. 

§  i.  Importance  of  the  function,  its  extent.  §  2.  Its  development.  The 
fee  theory.  §§  3,  4.  Compulsory  and  voluntary  services.  §  5. 
Police  expenditure.  §6.  The  prison  system  .  .  .  69-76 

CHAPTER  IV. 
ADMINISTRATIVE  SUPERVISION.     POOR-RELIEF. 

§  i  .  Decay  of  state  regulation  ;  its  revival.  §  2.  Reasons  for  this  new- 
growth.  §  3.  Tests  of  its  expediency.  §  4.  The  problem  of  poor- 
relief.  Conflicting  arguments.  §  5.  Practical  result.  §  6.  Other 
modes  of  assistance  -  .  .  .  .  .  . 


CHAPTER  V. 
EDUCATION.     RELIGION. 

§  i.  The  State  in  relation  to  education.  §  2.  In  primary  education. 
§  3.  In  secondary  education.  §  4.  In  University  education.  §  5. 
Technical  education.  §  6.  Other  means  of  culture.  §  7.  Volun- 
tary aid.  §  8.  Religious  endowments  ....  86-94 

CHAPTER  VI. 

EXPENDITURE  ON  INDUSTRY  AND  COMMERCE.     CONSTITUTIONAL  AND 
DIPLOMATIC  EXPENDITURE. 

§  i.  All  expenditure  is  partly  for  economic  ends.  §  2.  Action  of  the  State 
to  encourage  industry  generally.  §  3.  Assistance  to  special  branches 
of  industry  and  commerce.  §  4.  Over-expenditure  for  this  object 
rare.  §§  5,  6.  Maintenance  of  the  Government.  §  7  Cost  of 
public  debt  and  revenue  collection  ....  95-103 


CONTENTS.  xi 

CHAPTER  VII. 
CENTRAL  AND  LOCAL  EXPENDITURE. 

PAGES 

§  i.  Real  unity  of  general  and  local  government.  §  2.  Differences  in 
local  government  the  result  of  historical  conditions.  §  3.  But  yet 
conform  to  general  principles.  §  4.  Opposing  tendencies.  §  5. 
Greater  complexity  of  local  government  in  modern  times.  Its  causes. 
§  6.  Division  of  financial  duties  between  the  State  and  local  bodies. 
§  7-  Application  to  the  several  heads  of  expenditure.  §  8.  Some 
special  cases.  §9.  Central  control  expedient  .  .  .  104-122 

CHAPTER  VIII. 

SOME  GENERAL  QUESTIONS  OF  EXPENDITURE. 

§  i.  Ordinary  and  extraordinary  expenditure.  Various  uses  of  these 
terms.  §  2.  Productive  and  unproductive  expenditure.  §§  3,  4. 
Relation  of  public  to  national  revenue.  Proper  limit  of  the  former. 
§  5.  Growth  of  expenditure  in  modern  times.  Its  causes.  §  6. 
Influence  of  public  expenditure  on  the  national  economy  .  123-138 


BOOK  II. 

PUBLIC  REVENUE. 
THE    ECONOMIC    OR   QUASI-PRIVATE    RECEIPTS. 

CHAPTER  I. 
THE  FORMS  AND  CLASSIFICATION  OF  PUBLIC  REVENUES. 

Expenditure  and  revenue  correlative.  §  2.  Complexity  of  the  forms 
of  revenue.  Attempted  classifications.  §  3.  Criticisms.  §  4.  The 
true  arrangement.  §  5.  Divisions  of  the  economic  revenue  .  141-151 

CHAPTER  II. 
THE  STATE  DOMAIN.     LANDS  AND  FORESTS. 

The  origin  of  the  domain.  §§  2,  3.  Its  present  position  in  the 
several  countries  of  the  world.  §  4.  Land  nationalization.  §  5. 
Arguments  for  and  against  the  retention  of  public  lands.  §  6. 
Methods  of  management.  §  7.  Increase  of  public  lands  undesirable. 
§  8.  Exception  in  the  case  of  forests.  §  9.  The  actual  position  of 
public  forests.  §10.  Division  of  management  between  central  and 
local  governments  .  .  .  .  .  •  152~I73 


v. 


\ 


N 


Xll  CONTENTS. 

CHAPTER  III. 
THE  INDUSTRIAL  DOMAIN. 

PAGES 

§  I.  Contrast  between  agricultural  and  industrial  domain.  §  2.  State 
mines.  §  3.  State  manufacture  of  fine  products  and  for  its  own  use. 
§  4.  Monopoly  of  manufacture  for  taxation.  §§  5,  6.  Municipal 
industries.  Water-supply,  lighting,  drainage.  §  7.  The  Post  Office, 
its  history  and  present  position.  §  8.  It  is  a  combination  of  several 
distinct  industries.  §  9.  Its  financial  bearings.  §  10.  State  tele- 
graphs. §  ii.  Roads  and  canals.  §  12.  Treatment  of  railways. 
§  13.  French  railway  policy.  §  14.  German  state  railways  §  15. 
Other  European  railways.  §  16.  Railway  policy  of  non-European 
countries.  §  17.  Objections  to  the  system  of  state  railways.  §  18. 
Municipal  tramways.  §  19.  The  management  of  state  railways. 
§  20.  Treatment  of  state  employees.  §  21.  Financial  importance 
of  the  industrial  domain.  .....  174-212 

CHAPTER  IV. 

THE  STATE  AS  CAPITALIST.  ADMINISTRATIVE  REVENUE. 
§  i.  Decline  of  state  trading.  §  2.  State  banks.  §  3.  Public  lotteries. 
§  4.  The  State  as  lender.  §  5.  Fixed  charges  on  land.  §  6.  Dues. 
§  7.  The  fee  system.  §  8.  Juridical  fees.  §  9.  Administrative 
and  miscellaneous  fees.  §  TO.  Heterogeneous  character  of  the 
revenue  from  fees  ......  213-226 

CHAPTER  V. 
STATE  PROPERTY. — GENERAL  CONSIDERATIONS  ON  QUASI-PRIVATE 

REVENUE. 

§  i.  Growth  of  public  property  that  does  not  yield  revenue.  §  2<  Con- 
trast between  economic  and  tax  receipts.  §  3.  Division  of  the 
former  between  central  and  local  government.  §  4.  Difficulty  of 
laying  down  general  rules  on  the  subject.  §  5.  Proportion  of 
economic  receipts  to  total  revenue.  §  6.  Much  smaller  in  the  net 
than  in  the  gross  revenue  .  .  .  .227-238 

BOOK  III.      / 

PUBLIC  REVENUE. 
THE    PRINCIPLES    OF    TAXATION. 

CHAPTER  I. 
DEFINITION  AND  CLASSIFICATION  OF  TAXATION. 

§  i.  Prominence  of  taxation  in  Finance.  §  2.  Need  of  definitions. 
§  3.  Definition  of  taxation.  §§4,  5-  Other  definitions;  errors  in 
this  connexion.  §  6.  Etymological  meaning  of  terms.  §  7.  'Sub- 
ject' and  'source'  of  taxation.  §  8.  Use  of  terms,  'direct'  and 


CONTENTS.  Xlll 

PAGES 

'indirect,'  'real'  arm  'personal,'  'rated'  and  'apportioned.'  §  9. 
Economical  classification  of  taxes.  §  10.  Empirical  classifications. 
§  ii.  Grouping  adopted  in  the  present  work  .  .  .  241-259 

CHAPTER  II.  J 

THE  GENERAL  FEATURES  OF  TAXATION. 

§  i.  Study  of  the  broader  features  of  taxation  essential.  §  2.  Taxation 
means  a  deduction  of  wealth  and  therefore  is  an  evil ;  fallacies  on  this 
head.  §  3.  Taxation  hardly  ever  increases  production.  §  4.  It  is 
often  uneconomical.  §  5.  Income  the  normal  source  of  taxation, 
but  wealth  may  also  contribute.  §  6.  Theory  of  net  produce  ;  Phy- 
siocrat ic  view.  §  7.  Later  German  theories.  §  8.  Importance  of 
the  preceding  discussions  .  .  """  .  .  260-273 

CHAPTER  III. 
THE  DISTRIBUTION  OF  TAXATION.  , 

§  I.  Distribution  an  ethical  question,  but  involves  economic  considera-  » 

tions.  §  2.  The  theory  of  payment  for  state  service  ;  its  error. 
§  3.  Equal  payment  by  all.  Ability  as  a  measure  of  taxation. 
§  4.  Proportional  taxation  advocated  by  the  classical  economists. 
§  5.  Progressive  taxation  ;  reasons  for  its  popularity.  §  6.  Objec- 
tions to  its  use.  §  7.  Arguments  in  its  support.  §  8.  The  results 
of  experience.  §  9.  Degressive  taxation.  §  10.  Exemption  of  the 
minimum  of  subsistence.  §  n.  Treatment  of  (a)  temporary  in- 
comes; (£)  savings.  §  12.  Summary  of  preceding  sections.  §  13. 
Taxation  of  speculatiolT  and  unearned  increment.  §  14.  Inter- 
national double  taxation.  §  15.  Politico-social  view.  §  16. 
McCulloch's  theory  ......  274-307 

CHAPTER  IV. 
THE  TAX  SYSTEM.     ITS  FORMS. 

§  i.  Single  and  multiple  taxation.  §  2.  Proposals  of  Vauban  and 
Deckker.  §  3.  The  Impdt  unique  of  the  Physiocrats.  §  4.  Objec- 
tions to  the  single  tax.  §  5.  Evils  of  multiple  taxation.  §  6. 
Variety  in  taxation  desirable.  §  7.  Meanings  of  direct  and  indirect 
taxation.  §  8.  Merits  and  defects  of  direct  taxation.  §  9.  And 
of  indirect  taxation.  §  10.  Other  taxes.  §  II.  Combination  of 
the  three  classes  desirable.  §  12.  And  likely  to  continue  .  308-328 

CHAPTER  V. 
THE  INCIDENCE  OF  TAXATION. 

§  i.  Importance  of  the  question.  §  2.  Development  of  the  economic 
theory  of  incidence  ;  the  Physiocrats,  Adam  Smith,  Ricardo,  J.  S.  Mill. 
§  3.  Ciiticism  of  this  theory.  §  4.  The  diffusion  theory  of  taxa- 
tion ;  its  defects.  §  5.  The  incidence  of  a  tax  on  commodities. 


XIV  CONTENTS. 

PAGES 

§  6.  The  incidence  of  taxes  on  rent  and  the  shifting  of  taxation  to  rent. 
§  7.  Taxes  on  capital  and  employer's  gain ;  their  varied  incidence. 
§  8.  Taxes  on  wages  not  always  shifted.  §  9.  Complicated  nature 
of  shifting  .....  .  329~353 

CHAPTER  VI. 
THE  PRINCIPLES  OF  LOCAL  TAXATION. 

§  i.  Reasons  for  separating  local  from  general  taxation.  §  2.  The  his- 
tory of  local  institutions  helps  to  determine  their  revenue.  §3|s.  What 
taxes  should  belong  to  the  central  government.  §  4.  Those  that  are 
best  for  local  governments.  §  5.  Just  distribution  in  local  taxation. 
§  6.  Relations  between  general  and  local  Finance.  §  7.  The 
amount  of  liberty  to  be  granted  to  local  bodies  .  .  .  354-371 

Appendix.     The  maxims  of  Taxation.        ....     372-376 

BOOK  IV. 

PUBLIC  REVENUE. 
TAXATION.       THE    SEVERAL    KINDS    OF    TAXES. 

CHAPTER  I. 
TAXES  ON  LAND. 

§  i.  Antiquity  of  land  taxes.  §  2.  Their  development.  §  3.  Cadrastral 
surveys.  §  4.  English  taxes  on  land.  §  5.  The  Impdt  fonder  in 
France.  §  6.  Land  taxes  in  Italy,  Spain,  Portugal  and  Belgium. 
§  7.  In  Germany  and  Austria.  §  8.  General  features  of  land  taxa- 
tion. §  9.  Its  incidence  .....  379-394 

CHAPTER  II. 
TAXES  ON  CAPITAL  AND  BUSINESS. 

§  i.  Development  of  taxes  on  buildings.  §  2.  In  England.  §  3.  House 
and  building  taxes  in  other  countries.  §  4.  Further  considerations. 
§  5.  Incidence  of  these  taxes.  §  6.  Taxation  of  floating  capital. 
§  7.  Profits  more  readily  dealt  with.  §  8.  Taxation  of  profits  in  Eng- 
land. §  9.  The  Patente  in  France.  §  10.  Taxation  of  profits  in 
Italy,  Germany,  &c.  §  IT.  Characteristics  of  continental  taxation 
of  profits.  §  12.  The  incidence  of  taxes  on  business  profits  .  395-413 

CHAPTER  III. 
PERSONAL  AND  WAGES  TAXES. 

§  i.  Origin  of  poll  taxes.  §  2.  Illustrations  in  England,  France,  Russia 
and  Prussia.  §  3.  Decline  of  poll  or  wages  taxes  ;  their  unfairness. 

414-417 


CONTENTS.  XV 

CHAPTER  IV. 
TAXES  ON  PROPERTY  AND  INCOME. 

PAGES 

§  i.  General  abandonment  of  the  property  tax.  §  a.  Its  survival  in 
Switzerland  ;  peculiarities  of  the  system.  §  3.  Property  taxes  in  the 
United  States  ;  their  defects.  §  4.  Superiority  of  the  income-tax. 
§  5.  The  English  Income-tax.  §  6.  The  income-tax  in  Italy. 
§  7.  In  the  German  States.  §  8.  General  considerations  on  the 
income-tax.  §  9.  Its  incidence  ....  418-437  I  I 

CHAPTER  V. 

TAXES  ON  CONSUMPTION  :    THEIR  CLASSIFICATION. 

DIRECT  CONSUMPTION  TAXES. 

§  i.  Secondary  or  consumption  taxes.  §  2.  Their  classification.  §  3. 
Origin  and  decline  of  direct  taxes  on  consumption.  §  4.  English 
taxes  of  this  class.  §  5.  These  taxes  in  other  countries.  §  6.  Best 
reserved  for  local  purposes  .....  438-446 

CHAPTER  VI. 

INTERNAL  TAXES  ON  COMMODITIES. 

§  i.  Importance  of  excise  taxes ;  their  development.  §§  2,  3.  Problems 
of  excise  taxation.  §  4.  It  must  be  suited  to  the  particular  country. 
§  5.  History  and  present  position  of  the  British  Excise.  §  6.  His-  * 
tory  of  the  French  indirect  taxes.  §  7.  The  existing  French  system : 
its  principal  features,  its  defects.  §  8.  Italian  taxation  of  commo- 
dities. §  9.  History  of  the  German  Excises  ;  small  return  under  the 
present  system.  §  10.  Internal  taxation  in  other  countries.  §  n. 
General  features  of  modern  internal  taxation.  §12.  The  history  of 
Octrois.  §  13.  Their  present  use.  §  14.  Criticism  of  the  Octroi 
system.  §  15.  Incidence  of  excise  duties  .  .  .  447-488 

CHAPTER  VII. 
CUSTOMS  DUTIES. 

§  i.  The  early  forms  of  customs  taxation.  Its  gradual  development. 
§  2.  Customs  to  be  considered  in  connexion  with  the  Excise.  §  3. 
The  English  customs  system,  its  history  and  chief  features.  §  4. 
French  customs  duties,  their  financial  defects.  §  5.  Customs  duties 
in  Italy,  Germany,  and  other  countries.  §  6.  Intrusion  of  political 
motives  into  the  customs  system.  Prominence  of  import  duties. 
§  7.  The  incidence  of  customs  duties.  Complicated  nature  of  the 
problem  ........  489-509 

CHAPTER  VIII. 

TAXES  ON  COMMUNICATIONS,  ACTS  AND  SUCCESSIONS. 
§  i.  Different  elements   that   contributed   to  the  establishment   of  taxes 
on    circulation.       §  2.    Taxes    on    communication    and    transport. 


XVI  CONTENTS. 

PAGES 

§  3.  Stamps  as  a  form  of  taxation.  §  4.  Taxation  on  acts  and  trans- 
actions. §  5.  Stamp  and  registration  duties  in  England,  France,  Italy, 
and  Germany.  §  6.  Incidence  of  taxes  on  acts.  §  7.  Succession 
duties.  §  8.  The  English  death  duties.  §  9.  Succession  duties 
in  other  countries.  §  10.  The  incidence  of  succession  duties  .  510-532 


BOOK  V. 

THE  RELATIONS  OF  EXPENDITURE  AND  RECEIPTS. 

CHAPTER  I. 
INTRODUCTORY.     STATE  HOARDING. 

§  i.  Impossibility  of  keeping  complete  equality  between  expenditure  and 
receipts.  §  2.  Ancient  and  mediaeval  state  treasures.  §  3.  Reasons 
for  state  hoarding.  The  present  German  reserve.  Objections  to  the 
system  of  keeping  a  reserve.  §  4.  Public  debts  more  important  at 
present  .  .  535~542 

CHAPTER  II. 
PUBLIC  INDEBTEDNESS.     ITS  MODERN  DEVELOPMENT. 

§  i.  No  state  borrowing  in  classical  times.  §  2.  Mediaeval  state  bor- 
rowing. §  3.  Causes  of  modern  public  debts.  §  4.  Their  rapid 
growth.  §  5.  Summary  .  .  .  543-55° 

CHAPTER  III. 
THE  HISTORY  OF  THE  ENGLISH  DEBT. 

§  i.  Commencement  of  the  debt  at  the  Revolution;  its  early  progress 
(1692-1740).  §  2.  Chief  features  in  that  period.  §  3.  The  second 
period  (1740-1792).  §  4.  The  English  debt  during  the  French  war 
(T793~I^15)-  §  5-  The  Peace  history  of  the  debt.  §  6.  Reduction 
of  debt  by  redemption  and  conversion.  §  7.  The  continued  existence 
of  the  debt  due  to  war  and  to  weak  financial  policy  •  .  55 1-561 

CHAPTER  IV. 

HISTORY  OF  THE  FRENCH  DEBT.      INDEBTEDNESS  IN  OTHER 
COUNTRIES. 

§  i.  Borrowing  under  the  Ancien  Regime.  §  2.  The  formation  of  the 
present  debt  (1793-1870).  §  3.  The  Franco-German  war.  The 
actual  position.  §  4.  Public  debts  in  Italy  and  Germany.  §  5. 
The  history  and  present  position  of  the  United  States  debt.  §  6. 
General  increase  of  public  debts  ....  562-574 


CONTENTS.  XV11 

CHAPTER  V. 
THE  THEORY  OF  PUBLIC  CREDIT  AND  PUBLIC  DEBTS. 

PAGES 

§  i .  Public  credit  is  one  species  of  credit  in  general  and  governed  by  the 
principles  applicable  to  all  credit.  §  2.  Peculiar  features  of  public 
credit.  §  3.  Early  theories  as  to  advantages  of  public  debts.  §  4. 
The  views  of  Montesquieu,  Hume,  and  Adam  Smith.  Truth  and  error 
in  their  position.  §  5.  The  theory  of  Chalmers  and  J.  S.  Mill.  §  6. 
German  doctrines  :  C.  Dietzel's  theory  of  reproductive  borrowing. 
§  7.  Criticism  of  Chalmers.  §  8.  Of  the  theory  of  reproductive  bor- 
rowing. §  9.  The  real  effect  of  borrowing.  Taxation  and  borrow- 
ing contrasted.  §  10.  Borrowing  sometimes  desirable.  General 
rules.  §  ii.  Foreign  loans.  §  12.  Modes  of  estimating  the  pres- 
sure of  public  debt  ......  575-600 

CHAPTER  VI. 

THE  FORMS  OF  PUBLIC  DEBTS. 

Forced,  patriotic,  and  business  loans.  §  2.  Temporary  and  perpetual 
debts.  Advantage  of  the  latter.  §  3.  Variety  desirable.  §  4. 
Methods  of  contracting  loans.  §  5.  Loans  should  not  be  contracted 
under  par.  §  6.  Floating  debt  :  its  treatment.  §  7.  Incon- 

vertible paper  ......  601-61 2 

CHAPTER  VII. 
THE  REDEMPTION  AND  CONVERSION  OF  DEBT. 

Redemption  of  debt  desirable.  §  2.  Conditions  to  be  considered  in 
this  process.  §  3.  All  payment  must  be  out  of  surplus  revenue.  The 

/Sinking  Fund :  its  error.  §  4.  Necessity  of  debt  reduction.  §  5. 
Conversion  as  a  mode  of  relief.  §  6.  Redemption  by  a  single  property 
contribution.  §  7.  Automatic  reduction  of  debt.  §  8.  Is  there  any 
distinction  between  home  and  foreign  loans  in  respect  to  redemption  ? 

613-625 

CHAPTER  VIII. 
LOCAL  INDEBTEDNESS. 

§  i.  Danger  in  the  increase  of  local  debt.        §  2.  Instances  of  increase  in 

England  and  abroad.       §  3.  Causes  of  this  increase.       §  4.  Local 

/     borrowing  often  justifiable.       §  5.  Forms  of  local  loans.       §  6.  Re- 

/       payment  also  necessary  in  their  case.       §  7.  Provincial  and  county 

borrowing.       §  8.  Necessity  for  central  control  over  local  borrowing 

626-635 
b 


XV111  CONTENTS. 

BOOK  VI. 

FINANCIAL  ADMINISTRATION  AND  CONTROL. 

CHAPTER  I. 
INTRODUCTORY.     HISTORICAL  DEVELOPMENT. 

PACKS 

§  I.  Administration  and  control  a  necessary  part  of  financial  science. 
§  2.  Gradual  development  of  financial  regulation.  Classical  and 
mediaeval  periods.  §  3.  Regulation  under  absolute  monarchy. 
§  4.  Constitutional  system  of  English  origin.  §  5.  Its  extension  to 
other  countries.  §  6.  Modern  financial  systems  admit  of  general 
treatment  .......  639-647 

CHAPTER  II. 
THE  BUDGET  :  ITS  PREPARATION.     THE  COLLECTION  OF  REVENUE. 

§  i.  Meaning  of  the  term  '  Budget.'  §2.  Preliminary  estimates  necessary. 
§  3.  Period,  form,  and  matter  of  the  Budget.  Should  it  be  '  gross  '  or 
'  net '  ?  §  4.  Unity  of  the  Budget.  Should  it  deal  with  cash  or  trans- 
actions? Modes  of  estimating  income  and  outlay.  §  5.  The  collec- 
tion of  taxation.  Farming  of  taxes.  Apportionment.  Direct  state 
levy.  Rules  respecting  it.  §  6.  Dealing  with  the  funds  received 

648-658 

CHAPTER  III. 
THE  VOTE  OF  THE  BUDGET.     CONTROL  AND  AUDIT. 

§  i.  Summary  of  budgetary  rules.  §  2.  Method  of  examining  the  Budget. 
Right  of  proposing  expenditure.  §  3.  Relative  powers  of  the  two 
chambers.  Specialization  of  votes.  §  4.  Difficulty  of  adjusting 
income  to  outlay.  Supplemental  votes.  Fixed  expenditure  and  taxa- 
tion. §  5.  Comparison  of  English  and  French  methods.  §  6. 
Checks  over  issues.  Their  development  in  England,  France,  and 
Italy.  §  7.  Methods  of  audit.  The  English  appropriation  audit. 
The  United  States  system.  French  Cour  des  Comptes.  Other  coun- 
tries. §  8.  Conclusion  .....  659-672 


LIST  OF  WORKS  REFERRED  TO 

ALESSIO,  Saggio  sul  Sistema  Tributario  in  Italia,  2  vols.,  1883-7. 

BOLLES,  Financial  History  of  the  United  States  from  1861  to  1885  (1886). 

BRYCE,  The  American  Commonwealth,  2nd  ed.,  2  vols.,  1890. 

BUXTON,  Finance  and  Politics,  2  vols.,  1888. 

CLAMAGERAN,  Histoire  de  flmpdt  en  France,  3  vols.,  1867-76. 

CORN,  System  der  Finanzwissenschaft,  1889. 

DICEY,  The  Law  of  the  Constitution,  ist  ed.,  1885. 

DILKE,  Problems  of  Greater  Britain,  3rd  ed.,  1890. 

DOWELL,  A  History  of  Taxation  and  Taxes  in  England,  2nd  ed.,  4  vols., 
1888. 

ELY,  Taxation  in  American  States  and  Cities,  1888. 

FOURNIER  DE  FLAIX,  Traite  de  Critique  et  de  Statistique  Comparee  des 
Institutions  Financieres,  1889. 

HAMILTON,  An  Inquiry  concerning  the  National  Debt  of  Great  Britain, 
and  ed.,  1814. 

HOCK,  Offentliche  Abgaben  und  Schulden,  1863. 

HUMBERT,  Essai  sur  les  Finances  et  la  Comptabilite"  chez  les  Remains, 
3  vols.,  1886. 

LEROY  BEAULIEU,  Traite  de  la  Science  des  Finances,  3™°  ed.,  2  vols.,  1883. 

M'CuLLOCH,  Treatise  on  Taxation  and  the  Funding  System,  3rd  ed.,  1863. 

MARSHALL,  Principles  of  Economics,  vol.  i,  ist  ed.,  1890. 

MEYER,  Die  Principien  der  gerechten  Besteuerung,  1884. 

PARIEU,  DE,  Traite  des  Impdts,  2™*  ed.,  4  vols.,  1866-7. 

FARNELL,  On  Financial  Reform,  2nd  ed.,  1830. 

RICARDO,  Works  (ed.  J.  R.  McCulloch),  1846. 

ROSCHER,  System  der  Finanzwissenschaft,  2nd  ed.,  1886. 

SCHAFFLE,  Grundsdtze  der  Steuerpolitik,  1880. 

SCHONBERG,  Finanzwissenschaft  und  Verwaltungslehre  (the  3rd  vol.  of 
the  Handbuch  der  Politischen  Oekonomie],  2nd  ed.,  1885. 

SIDGWICK,  The  Principles  of  Political  Economy,  ist  ed.,  1883. 

ADAM  SMITH,  The  Wealth  of  Nations  (ed.  J.  S.  Nicholson),  1884. 

STEIN,  Lehrbuch  der  Finanzwissenschaft,  5th  ed.,  4  vols.,  1885-6. 

STOURM,  Les  Finances  de  VAncien  Regime  et  de  la  Revolution,  2  vols.,  1885. 

STOURM,  Le  Budget,  ire  ed.,  1889. 

TURGOT,  (Euvres  (ed.  Daire),  2  vols.,  1844. 

UMPFENBACH,  Lehrbuch  der  Finanzwissenschaft,  2nd  ed.,  1887. 

VIGNES,  Traite  des  Impdts  en  France,  4™  ed.,  2  vols.,  1880. 

VOCKE,  Die  Abgaben,  Aufagen  und  die  Steuer,  1887. 

WAGNER,  Finanzwissenschaft,  vol.  i,  3rd  ed.,  1883  ;  vol.  ii,  2nd  ed.,  1890  ; 
vol.  iii,  ist  ed.,  1889. 


ERRATA    ET   ADDENDA 

Page    30,  line  "*»for  and  read  with 

,,       32     „    14,  to  the  books  on  English  taxation  add  Wilson's  National  Budget 
(1882). 

»       5*>    i,  33>  for  Puts  >"«&*  Put 

„     159     „    6,  for  has  raza?  have 

„     182,  note,  line  3,  insert  to  fo/or^  quasi-public 

„     275     „  12,  for  v=>  read  zxz 

„     316     ,,    4,  insert  that  of  0/fer  is 

»»     387     „  19,  /0r  ^10,400,000  r«j«/  £10,200,000 

,,     388     ,,  17,  for  £9,200,000  read  £9,600,000 

„  411,  note,  add  Under  the  Prussian  Law  of  1891 — to  come  into  force  in 
1893 — the  Geiverbesteuer  will  be  adjusted  according  to  product  and 
capital  employed.  The  contributors  are  to  be  grouped  in  four  classes, 
the  highest  consisting  of  those  whose  product  is  over  ,£2000,  or  whose 
capital  is  over  ,£50,000. 


INTRODUCTION. 


I. 

§  1.  IN  any  society  that  has  passed  beyond  the  lowest 
stage  of  social  development,  some  form  of  governmental 
organization  is  found  to  be  an  essential  feature.  The 
various  activities  or  functions  of  this  controlling  body 
furnish  the  material  for  what  are  known  as  the  '  Political 
Sciences '  (Staatswissenschafteti).  Every  governing  body  or 
'  State '  requires  for  the  due  discharge  of  its  functions 
repeated  supplies  of  commodities  and  personal  services, 
which  it  has  to  apply  to  the  accomplishment  of  what- 
ever ends  it  may  regard  as  desirable.  The  processes  in- 
volved in  obtaining  and  using  these  supplies  naturally  vary 
much  in  the  several  stages  of  social  advance :  they  are 
comparatively  simple  and  direct  in  a  primitive  community, 
while  in  a  modern  industrial  society  they  present  a  high 
degree  of  complication,  and  are  carried  out  by  elaborate 
regulations.  For  all  States,  however  —  whether  rude  or 
highly  developed, — some  provisions  of  the  kind  are  neces- 
sary and  therefore  the  supply  and  application  of  state 
resources  constitutes  the  subject-matter  of  a  study  which 
is  best  entitled  in  English,  PUBLIC  FINANCE *. 

1  For  the  various  meanings  of  the  term  '  Finance,'  see  Roscher,  §  i,  also 
Gamier,  1-3.  The  original  idea  is  that  of  paying  a  fine  (finare}.  Unfortunately, 
in  England  the  word  has  been  used  with  a  wider  meaning,  as  including  all 
monetary  and  even  industrial  facts.  Thus  we  have  Jevons'  Investigations  in 
Currency  and  Finance,  Mr.  Patterson's  Science  of  Finance,  and  Mr.  Giffen's 
Essays  in  Finance,  all  dealing  mainly  with  those  wider  questions.  An  English 

B 


2  INTRODUCTION. 

§  2.  The  importance  of  the  subject  hardly  requires  much 
insistence.  The  collection  of  funds  for  state  purposes  and 
the  use  of  the  resources  so  obtained  is  such  a  vital  part  of 
the  political  organization,  that  it  is  almost  certain  to  receive 
attention  from  all  who  are  interested  in  political  and  social 
inquiries.  But,  if  demanded,  abundant  evidence  is  at  hand. 
The  citizen  of  any  civilized  country  need  only  reflect  for  a 
few  minutes  in  order  to  satisfy  himself  of  the  number  and 
importance  of  the  actions  of  the  State  on  its  financial  side. 
His  letters  are  carried  by  a  state  agency  which  claims  a 
monopoly,  and  in  some  cases  realizes  a  large  profit  for  the 
general  revenue.  The  commodities  that  supply  his  table 
are  in  many  cases  taxed  to  create  a  fund  for  the  payment 
of  public  services.  Either  his  income  or  property  or  some 
of  their  elements  is  sure  to  be  subjected  to  a  charge  of 
greater  or  less  amount,  and  several  of  the  most  ordinary 
avocations  are  only  open  to  him  on  obtaining  a  costly 
licence  for  permission  to  engage  in  them.  The  claims  of 
the  State  do  not  cease  here.  In  addition  to  the  central 
body,  the  local  authorities  have  to  be  considered.  If  the 
person  of  our  supposition  be  the  inhabitant  of  a  town,  his 
house  may  be  lighted  by  public  agency,  while  it  is  more  than 
possible  that  for  one  of  the  first  necessaries  of  life — water — 
he  is  dependent  on  his  municipality.  There  is  little  need  for 
further  working  out  of  details.  The  way  in  which  the  purely 
financial  agencies  of  the  State — and  still  more  those  which 
have  some  connexion  with  Finance — affect  the  members  of 
the  society  in  their  every-day  existence,  is  being  always 
illustrated  afresh  by  the  ordinary  course  of  social  life. 

§  3.  The  importance  of  a  subject  is  of  itself  a  strong  plea 
for  its  scientific  study,  but  in  the  present  case  more  special 
arguments  may  be  urged.  There  is  in  Finance,  as  in  all 
matters  depending  in  some  degree  on  human  will,  the  pos- 
sibility of  choosing  between  different  courses,  some  of  which 

writer  is  therefore  compelled,  in  order  to  avoid  misapprehension,  to  limit  the 
word  as  in  the  text,  when  he  is  treating  of  what  the  Germans  can  without 
inconvenience  call  Finanzwissenschaft  or  the  French  Science  des  Finances. 


INTRODUCTION.  3 

are  likely  to  prove  better  than  others,  and  for  the  formation 
of  a  correct  judgment  as  to  the  relative  merits  of  the  lines 
of  action  open  to  the  State,  careful  examination  of  the 
conditions  affecting  the  phenomena  is  indispensable.  Such 
examination  is,  however,  only  possible  by  scientific  study, 
or  rather  it  is  that  study.  More  particularly  is  this  true  at 
present  in  consequence  of  the  great  expansion  of  the  func- 
tions of  the  State,  which  is  partly  due  to — and  which  in 
turn  increases — the  complications  of  modern  societies.  The 
effects  of  state  action  in  a  primitive  community  are  far  more 
easily  followed  ;  the  forms  both  of  revenue  and  expenditure 
are  reducible  to  a  few  simple  kinds,  directed  by  rude  and 
partially  developed  agencies.  The  modern  State,  even  when 
it  allows  an  amount  of  individual  liberty  unknown  in  any 
former  period  is  obliged  to  employ  complicated  machinery 
for  the  regulation  and  management  of  its  outlay  and  re- 
ceipts. The  results,  moreover,  are  not  so  readily  perceived  ; 
numerous  interests  and  classes  are  affected  by  any  change 
in  the  course  of  public  expenditure  or  by  readjustments  of 
taxation.  The  many  indirect  results  of  financial  processes 
must  be  considered  before  we  can  either  understand  their 
operation  or  fairly  judge  their  merits  ;  but  to  trace  the 
action  of  economic  forces  in  their  effects  on  the  highly 
developed  systems  of  modern  industrial  societies  is  a  task 
of  considerable  difficulty,  not  to  be  accomplished  without 
the  aid  of  general  principles,  and  careful  reference  to  former 
experience.  The  case  for  a  scientific  study  of  Finance  is  so 
strong  that  it  does  not  require  much  vindication,  and  the 
value  of  critical  investigations  has  been  already  verified  by 
the  results  obtained. 

§  4.  The  scope  of  our  subject  has  been  already  indicated 
in  a  general  way,  but  for  clearness  of  thought  and  in  conse- 
quence of  the  differing  views  of  many  writers  of  authority 
we  must  now  determine  it  more  precisely.  State  expendi- 
ture and  state  revenue  at  once  occur  to  the  mind  as  the 
two  great  heads  of  inquiry,  standing  opposed  to  each  other 
as  Production  and  Consumption,  or  Supply  and  Demand 

t  B  2, 


4  INTRODUCTION. 

do  in  economic  science.  Closer  examination  shows  that 
this  simple  grouping  does  not  exhaust  the  field  of  investi- 
gation. Problems  of  revenue  and  of  expenditure  are 
indeed  the  most  important.  Adam  Smith,  who  was,  at 
least  for  England,  the  founder  of  the  scientific  study  of 
Public  Finance,  as  of  Political  Economy  in  general,  devoted 
separate  chapters  of  his  Fifth  Book  to  '  The  Expenses  of 
the  Sovereign  '  and  '  The  Revenues  of  the  Sovereign ' ;  but 
by  the  nature  of  the  subject  he  found  himself  forced  to  add 
a  third  section,  in  which  the  relation  between  expenditure 
and  receipts  is  examined.  He  knew  that  many  ancient  and 
mediaeval  sovereigns  had  accumulated  treasures  ;  it  was 
apparent  that  most  modern  governments  had  heaped  up 
debts — a  process  that  has  been  carried  much  further  since 
his  day — and  it  followed  that  an  enquiry  into  the  balance 
between  state  incomings  and  outgoings  was  an  essential — 
as  it  is  also  a  difficult — part  of  Public  Finance. 

Nor  is  this  the  only  addition.  The  phenomena  to  be  dealt 
with  do  not  admit  of  being  conveniently  grouped  under 
Adam  Smith's  three  heads.  This  difficulty  is  at  once  felt 
on  calling  to  mind  that  the  expenditure  and  revenue  under 
consideration  is  state  expenditure  and  state  revenue.  We 
must  examine  not  the  processes  merely,  but  the  mechanism 
by  which  those  processes  are  carried  on.  The  collection 
and  application  of  wealth  by  the  State  require  legislative 
and  administrative  action.  The  right  of  voting  supplies 
and  supervising  expenditure — { the  power  of  the  purse ' — is 
one  of  the  leading  privileges  of  a  representative  body  ;  it  is 
also  the  most  effectual  safeguard  of  constitutional  rights. 
Methods  of  administrative  control  seriously  affect  the  work- 
ing of  the  national  finances,  and  are  deserving  of  attentive 
study.  No  financial  treatise  can  be  complete  unless  it  con- 
siders the  problems  of  'the  Budget'  and  '  financial  adminis- 
tration' (Finanzverwaltung\  and  such  has  in  late  years 
been  the  almost  invariable  practice1. 

1  That  is  with  continental  writers.  In  England  these  topics  are  generally 
relegated  to  works  on  '  Constitutional  Law '  and  '  Parliamentary  Usage.' 


INTRODUCTION.  5 

§  5.  In  one  respect  the  scope  of  Public  Finance  has  been 
curtailed  by  some  of  its  ablest  expounders.  French  writers, 
more  especially  M.  P.  Leroy-Beaulieu,  have  refused  to  re- 
gard the  problems  of  public  expenditure  as  a  part  of  their 
subject.  The  reason  for  this  limitation  is  said  to  be  the 
difficulty  of  scientifically  determining  the  proper  amount  of 
state  outlay,  as  that  must  depend  on  the  functions  assigned 
to  the  State.  '  This  kind  of  inquiry,'  says  M.  Leroy- 
Beaulieu,  '  does  not  in  my  opinion  belong  to  the  science 

of  Finance A  State  has  wants  :  it  does  not  belong 

to  us  at  present  to  know  what  they  are,  and  what  they 
ought  to  be,  but  how  it  is  possible  to  satisfy  them  in  the 
amplest  manner  with  the  least  loss  and  sacrifice  to  indivi- 
duals. If  you  engage  a  builder  to  build  you  a  house,  it  is 
not  his  business  to  inquire  if  the  building  is  too  large  for 
your  income  or  your  social  position  ;  what  does  concern 
him  is  to  build  the  house  in  question  with  the  utmost  pos- 
sible solidity,  convenience,  and  beauty,  at  the  lowest  cost  to 
the  owner.  In  like  manner,  a  writer  on  Finance  can  sin- 
cerely lament  that  States  spend  too  much,  but  his  real  task 
lies  in  showing  how  a  State  can  obtain  supplies,  while  treat- 
ing the  interests  of  individuals  with  due  tenderness  and 
respecting  justice  V 

English  writers  have  gone  further  in  this  direction,  and, 
by  disregarding  all  forms  of  state  revenue  except  that 
derived  from  taxation,  have  replaced  the  broader  treatment 
of  Adam  Smith  and  the  Germans  by  treatises  on  '  Taxa- 
tion '  and  '  Public  Debts  V 

It  nevertheless  seems  clear  that  the  question  of  expendi- 
ture is  just  as  much  a  financial  problem  as  that  of 
revenue.  Neither  in  theory  nor  in  practice  is  it  advisable 
to  separate  them  completely.  The  greatest  finance 

1  Leroy-Beaulieu,  i.  2,  3. 

2  Cf.  the  title  of  J.  R.  McCulloch's  well-known  work,    Taxation  and  the 
Funding  System.     So  strong  is  the  disposition  in  England  and  America  to 
limit  the  subject  of  Finance  to  Taxation,  that  in  the  recent  American  trans- 
lation of  Cossa's  useful  Sdenza  delle  Finanze,  the  title  is  changed  into  Taxa- 
tion ;  its  Principles  and  Methods. 


6  INTRODUCTION. 

ministers  have  made  their  reputations  as  much  by  judicious 
control  of  outlay  as  by  wise  reforms  in  revenue  1,  while  for 
theoretical  discussion  the  principles  and  facts  of  expendi- 
ture   are   of    considerable    interest.     M.    Leroy-Beaulieu's 
suggested  parallel  of  the  builder  is  not  in  point,  since  the 
practical  statesman  is  the  only  person  to  whom  the  illus- 
tration  would  apply,  and  he  evidently  does    not   act   in 
conformity  with  it ;  the  scientific  student  is  only  limited 
in  his  inquiries  by  the  nature  of  the  material  that  he  is 
investigating.      One     admission    may    indeed     be    made. 
Questions  of  expenditure  do  not  admit  of  quite  as  precise 
treatment  as  those  referring  to  taxation,  some  parts  of  the 
latter  subject  permitting  the  use  of  lengthened  deductions. 
This  test  of  fitness  for  exact  investigation  would,  however, 
exclude  other  large  parts  of  the  subject — e.  g.  '  the  public 
domain ' — which  are  nevertheless   discussed  by  all  recent 
writers,    M.    Leroy-Beaulieu    included.      For   a   complete 
inquiry  into  the  theory  of  Finance  some  consideration  of 
the  conditions  governing  state  outlay  is  indispensable,  e.  g. 
the  increase  of  military   expenditure  in  European  States, 
its  causes  and  limits,  cannot  be  left  wholly  unnoticed  by 
any  thorough  student  of  Public  Finance.     Such  an  inquiry 
is  more  especially  needed  owing  to  the  fact  that  expendi- 
ture  and  revenue   are   connected.     Public   outlay    is    not 
something  unchangeable  and  determined,  to  be  met  *  with 
the  least  loss  and  sacrifice  to  individuals.'     Expenditure 
that  would  be  legitimate  in  a  lightly  taxed  State  would  be 
blameworthy  in   one  that  is  heavily  taxed.     The  aim  of 
the  statesman  is  not  simply  to  distribute  loss  and  reduce 
it  to  a  minimum,  it  is  rather  to  procure  the  maximum  of 
advantage  to  the  community,  and  to  so  balance  expendi- 
ture and  revenue  as  to  attain  that  result. 

The  principal  difficulty  in  the  scientific  examination  of 
public  expenditure  is  found  when  attempting  to  limit  the 

1  The  statement  of  Turgot's  policy  in  his  Letter  to  the  King  (ii.  165) :  Point 
de  banqueroute,  point  d' augmentation  dimpots,  point  aewprunts,  is  a  striking 
example. 


INTRODUCTION.  7 

mode  of  treatment.  Some  writers  enter  into  discussions 
as  to  the  legitimacy  of  certain  state  functions,  and  their 
relative  urgency.  Others  simply  state  the  forms  and  facts 
of  public  outlay,  leaving  further  inquiry  to  the  political 
theorist.  In  the  present  work,  in  accordance  with  the 
precedent  set  by  Adam  Smith,  the  several  items  of  ex- 
penditure will  be  treated  on  a  positive  basis,  and  at  the 
same  time  the  considerations  naturally  arising  from  their 
existence,  and  the  financial  questions  that  they  suggest 
will  be  noticed,  though  no  complete  examination  of  state 
functions  will  be  aimed  at.  Whatever  theoretical  questions 
may  be  raised,  such  seems  to  be  the  course  that  con- 
venience suggests,  and  is  one  to  which  the  subject  naturally 
lends  itself.  Our  object  is  to  elucidate  the  principles  of 
Public  Finance  ;  and  the  admission  or  exclusion  of  any 
special  topic,  as  well  as  the  extent  of  treatment  in  each 
case  must  be  determined  solely  by  reference  to  that 
end1. 

§  6.  Theoretical  writers  on  Finance,  especially  in  Germany, 
have  very  fully  considered  the  relations  of  their  subject 
to  cognate  branches  of  knowledge,  i.  e.  to  the  various  social 
and  political  sciences,  and  have  in  particular  emphasized 
its  close  ties  to  Economics  2.  In  its  origin  financial  science 
was  a  product  of  economic  study.  It  appears  either  as  a 
special  section  or  as  the  main  subject  of  the  older  treatises 
of  Political  Economy,  '  when  considered  as  a  branch  of  the 
science  of  a  statesman  or  legislator,'  to  quote  Adam  Smith's 
phrase.  In  another  aspect  it  may  be  regarded  as  belong- 
ing to  administration,  and  as  such  formed  a  large  part  of 
the  'Chamber  Science'  (Camerahvissenschaft)  which  was 
in  Germany  the  precursor  of  scientific  Economics.  The 
undue  limitation  of  the  scope  of  Finance  by  English 
writers  has  led  to  its  inclusion  under  the  title  of  '  taxation  ' 


1  The  omission  of  public  expenditure  as  a  topic  in  '  Finance,'  in  the  case  of 
English  writers,  was  perhaps  in  part  caused  by  neglect  of  the  economic  theory 
of  the  'Consumption  of  Wealth '  with  which  it  would  be  naturally  connected. 

2  E.  g.  Umpfenbach,  1-22  ;  Roscher,  §  5  ;  Cohn,  §§  4-7  ;  Wagner,  i.  16-20. 


8  INTRODUCTION. 

in  the  various  systematic  expositions  of  Political  Economy1, 
and  the  more  enlarged  view  taken  by  German  writers  has 
not  prevented  a  similar  result  in  that  country,  for  since 
the  time  of  K.  H.  Rau,  Political  Economy  has  been 
regarded  as  comprising,  in  addition  to  the  general  theory, 
the  Economics  of  special  industries,  economic  legislation 
and  administration,  as  well  as  Public  Finance 2.  This 
apparent  absorption  of  Finance  in  Economics  is  really  the 
result  of  a  peculiar  conception.  If  the  latter  science  be 
limited,  in  the  manner  usual  in  England  and  France,  to 
an  investigation  of  the  laws  governing  the  phenomena  of 
wealth,  it  is  beyond  dispute  that  Public  Finance  cannot 
form  a  part  of  it,  as  political  and  fiscal  conditions  have  to 
be  recognised  to  an  extent  impossible  in  a  pure  science 
of  wealth.  Moreover  practical  considerations  have  to  be 
weighed  in  every  department  of  Finance.  That  Political 
Economy  in  the  most  extended  use  of  the  term  may  fitly 
include  Finance  is  indeed  true,  but  then  it  would  appear 
that  this  wider  Political  Economy  is  nothing  more  than 
a  common  name  for  the  various  social  and  political  sciences ; 
it  is  in  fact  a  rudimentary  Sociology  and  Art  of  Politics 
combined  3. 

§  7.  Though  the  problems  of  Finance  are  really  suited 
for  treatment  in  a  separate  form,  it  does  not  follow  that 
their  relation  to  Economics  should  be  disregarded.  On 
the  contrary  there  is  a  close  connexion,  or  rather  series  of 
connexions  between  the  two  studies.  State  outlay  is  a 
part  of  the  consumption  of  the  society  of  which  the  State 
is  the  regulating  organ,  and  for  a  knowledge  of  the  con- 


1  The  works  of  J.  S.  Mill,  Fawcett,  and  Shadwell  may  be  given  as  ex- 
amples. 

2  The  treatises  of  Rau,  Roscher,  Wagner,  and  Cohn  on  Finance  are  all  in 
name  sections  of  text-books  of  Political  Economy.     The  collection  of  mono- 
graphs on  financial  questions  in  the  Schonberg  Handbuch  is  another  instance. 

3  Examination  of  the  works  referred  to  in  the  preceding  note  will  support 
the  statement  in  the  text.     The  financial  sections  of  the  treatises  there  men- 
tioned are  in  fact  independent  works,  and  may  be  studied  quite  apart  from  the 
other  sections. 


INTRODUCTION.  9 

ditions  that  govern  it  we  must  have  a  theory  of  the  con- 
sumption of  wealth  in  general.  Unhappily,  questions  re- 
lating to  consumption  have  been  too  much  neglected  by 
economists,  and  thus  there  is  no  complete  theory  available 
for  application  to  financial  problems.  Still,  the  leading 
truths  on  the  matter  are  suggested  in  modern  economic 
theories,  and  may  be  developed  by  their  aid.  The  manage- 
ment of  state  property,  again,  requires  a  reference  to  various 
economic  doctrines,  and  more  especially  the  industrial 
enterprises  carried  on  under  a  public  monopoly  illustrate 
and  are  explained  by  the  general  theory  of  monoplies. 
It  is,  however,  when  we  reach  taxation  that  the  aid  of 
Economics  becomes  most  valuable.  The  merits  of  the 
general  system  of  taxation,  as  also  those  of  each  special 
tax  have  to  be  tested  by  the  aid  of  economic  principles. 
The  important  problem  of  justice  in  taxation  is  indeed 
an  ethical  one,  but  until  its  economic  efforts  are  known  it 
is  impossible  to  say  whether  any  given  form  of  taxation  is 
just  or  the  reverse.  All  the  intricate  points  respecting  the 
incidence  of  taxation  can  be  handled  successfully  only  by 
applying  a  sound  theory  of  the  distribution  of  wealth,  and 
the  effect  of  taxation  on  accumulation  makes  it  necessary  to 
constantly  bear  in  mind  the  conditions  of  effective  pro- 
duction. In  another  department  of  Finance,  the  nature 
and  effect  of  public  loans  can  be  best  explained  by  the 
economic  theory  of  credit,  and  such  is  the  course  usually 
adopted.  An  acquaintance  with  economic  science  is,  it 
may  be  said,  an  indispensable  part  of  the  equipment  of  the 
student  of  Finance. 

§  8.  Close  as  is  the  relation  between  Economics  and 
Finance,  it  is  by  no  means  exclusively  to  the  former 
science  that  we  have  to  look  for  aid  when  developing  the 
latter.  In  a  subject  so  inseparable  from  the  State,  it  is  in 
many  cases  necessary  to  recognise  the  action  of  political 
and  administrative  conditions.  Financial  problems  are 
often  the  occasions  on  which  constitutional  issues  are  raised, 
and  as  noticed  above,  they  may  make  a  line  of  conduct 


f 


IO  INTRODUCTION. 

desirable,  that  from  the  purely  economic  point  of  view 
would  be  very  objectionable.  The  same  statement  holds 
good  of  administration 1.  The  whole  system  of  Finance 
must  be  kept  in  conformity  with  the  general  mode  of 
managing  the  affairs  of  the  State.  This  is,  in  fact,  involved 
in  the  position  that  Public  Finance  belongs  to  the  domain 
of  Political  Science. 

The  science  of  Finance  has  another  important  auxiliary 
in  History,  which  illustrates,  verifies,  and  in  some  instances 
affords  data  for  its  principles.  The  material  of  Public 
Finance  is  not  confined  to  that  afforded  by  modern 
societies,  and  even  for  a  true  knowledge  of  actual  con- 
ditions it  is  often  necessary  to  be  acquainted  with  their 
growth.  No  pure  a  priori  system  of  Finance  can  be 
successfully  established.  Each  country  has  special  features 
arising  from  its  previous  history,  and  the  sentiments  of 
its  people — in  great  part  the  product  of  historical  forces. 
The  most  violent  revolution  cannot  really  break  this  con- 
nexion with  the  past2.  As  a  consequence,  a  system  of 
Finance  admirably  suited  for  one  country,  may  be  quite 
unfitted  for  another.  A  comparison  of  the'systems  of  the 
United  Kingdom  and  of  India  shows  at  a  glance  extra- 
ordinary differences,  and  yet  in  each  case  the  attainment 
of  solid  results.  These  obvious  truths,  however,  suggest 
the  need  of  a  caution.  The  necessary  varieties  of  financial 
practice  do  not  show  that  general  principles  are  unattain- 
able, though  they  tend  to  render  their  application  more 
difficult.  The  conclusions  of  financial  theory  ought  to 
underlie  all  the  special  systems  and  regulations,  but  they 
require  to  be  applied  with  most  careful  regard  to  the  cir- 

1  The  determination  of  the  comparative  advantages  of  raising  supplies  by 
loans  or  by  fresh  taxation,  the  choice  between  different  methods  of  levying 
taxes,  and  the  need  in  certain  cases  of  resorting  to  issues  of  inconvertible  paper 
are  instances. 

2  French  financial  history  is  the  best  possible  illustration.     M.  Stourm  in 
his  valuable  work,  Les  Finances  de  Vancien  Regime  et  de  la  Revolution,  has 
shown  conclusively  that  the  modern  French  system  is  developed  from  that 
existing  before  the  Revolution.     Stourm,  passim,  and  especially  ii.  501-2. 


INTRODUCTION.  11 

cumstances  of  time  and  place,  and  above  all,  to  the  senti- 
ments and  habits  of  the  people.  Any  form  of  expenditure 
or  taxation  that  is  peculiarly  obnoxious,  has,  by  that  fact 
alone,  a  strong  presumption  raised  against  it,  to  be  re- 
butted only  by  very  weighty  reasons  on  the  other  side. 

As  history  throws  light  on  the  evolution  of  Finance,  and 
enables  us  to  confirm  or  to  limit  our  general  propositions 
by  the  evidence  derived  from  previous  times,  so  do 
Statistics  give  us  a  firmer  position  in  dealing  with  the 
present.  Without  correct  information  as  to  state  revenue 
and  expenditure,  financial  policy  is  little  better  than  guess- 
work. In  order  to  comprehend  the  effects  of  taxation  it  is 
indispensable  to  have  full  statistics  as  to  the  distribution  of 
wealth  among  classes  and  among  localities.  Such  materials 
as  those  collected  by  census  agencies  and  statistical  de- 
partments are  necessary  elements  in  any  financial  calcula- 
tions, and  their  absence,  of  itself,  suffices  to  explain  the 
late  origin  of  financial  science.  In  no  respect  is  modern 
administration  so  superior  to  that  of  ancient  and  mediaeval 
times,  as  in  the  improved  data  on  which  it  bases  its  esti- 
mates and  makes  its  practical  suggestions. 

§  9.  From  an  examination  of  the  various  sciences  that 
may  assist  the  study  of  Finance,  we  pass  by  a  natural 
transition  to  the  proper  method  of  inquiry.  In  regard  to 
all  Social  Science,  and  notably  to  Economics,  this  question 
has  been  vigorously  discussed,  even  to  the  neglect  of  the 
positive  matter  of  research  The  principles  of  scientific  in- 
quiry and  the  appropriate  method  of  investigation  belong 
in  reality  rather  to  Logic  than  to  the  special  sciences  ; 
though  the  processes  employed  in  discovery  can  only  be 
adequately  appreciated  by  those  who  are  conversant  with 
the  particular  branch  in  which  they  are  used.  At  all 
events,  it  is  clear  that  the  disputes  as  to  method  have  in 
many  cases  arisen  from  misapprehension  as  to  the  exact 
position  of  each  of  the  contending  parties.  Protracted  con- 
troversy has,  however,  finally  led,  if  not  to  complete  agree- 
ment, at  least  to  a  recognition  of  the  common  ground 


12  INTRODUCTION. 

occupied  by  the  disputants,  and  also,  it  may  be  said,  to  a 
belief  that  the  whole  question  is,  as  has  been  often  re- 
marked, one  of  '  emphasis.'  A  difference  in  view  is,  in 
many  cases,  the  result  of  personal  tastes  ;  one  writer  places 
much  weight  on  a  particular  method,  another  on  a  differ- 
ent and  apparently  opposed  one,  though  both,  if  interro- 
gated, would  probably  allow  that  each  form  of  inquiry  was 
valid  within  limits,  the  exact  fixing  of  which  would  be  the 
only  point  in  dispute  \ 

The  principal  ground  of  debate  was  for  a  long  period 
as  to  the  claims  of  the  *  inductive '  and  the  *  deductive  ' 
methods  to  be  regarded  as  the  legitimate  process  of  in- 
vestigation. To  that  question  it  may  be  confidently 
replied  that  both  are  in  particular  cases  valid  and  indeed 
indispensable.  Without  '  induction '  in  the  wider  sense  of 
the  term  2  no  materials  for  study  would  be  available  :  mere 
observation  without  arrangement  and  generalisation  is 
evidently  worthless  for  scientific  use.  The  particular  form 
of  induction  which  proceeds  by  comparison  is  frequently 
serviceable.  The  simple  juxtaposition  of  two  financial 
systems  will  sometimes  throw  a  great  deal  of  light  on  the 
conditions  governing  each.  In  this  process  history,  as  we 
saw  in  the  preceding  section,  plays  a  great  part,  and  it  is 
thus  quite  correct  to  maintain  that  the  science  of  Finance 
is  in  one  of  its  aspects  '  inductive,'  '  comparative/  and 
*  historical.' 

But  this,  though  the  truth,  is  not  the  whole  truth. 
The  generalizations  of  Economics  and  the  permanent 
facts  of  human  nature  enable  us  to  draw  important 

1  On  this  subject  see  Wagner,  iii.  199,  and  his  article  in  Conrad's  Jahr- 
biicher,  1886,  i.  197  sq. ;  Dunbar  in  Quarterly  Journal  of  Economics,  i.  I  sq. ; 
Marshall,  Principles  of  Economics,  Bk.  i.  ^h.  5  ;  also  J.  N.  Keynes,  Method  and 
Scope  of  Political  Economy. 

z  Cairnes'  Logical  Method  (2nd  ed.),  60  sq.  The  varying  use  of  the  term 
'  induction '  by  logicians  has  helped  to  increase  the  confusion  as  to  the  real 
relation  of  the  inductive  and  deductive  methods.  Cf.  J.  S.  Mill,  Logic,  Bk.  ii. 
ch.  4,  §  5 ;  and  Bk.  iii.  ch.  2,  which  contains  his  controversy  with  Whewell  on 
this  point. 


INTRODUCTION.  13 

conclusions  as  to  the  effects  of  certain  forces  in  their 
bearing  on  Finance.  The  whole  theory  of  the  incidence 
and  repercussion  of  taxation  is  and  must  be  '  deductive, 
i.  e.  it  must  be  developed  from  simple  conditions  by  logical 
trains  of  reasoning.  Deduction,  too,  is  needed  in  order  to 
ascertain  the  effects  of  public  indebtedness  as  well  as  to 
trace  the  ultimate  results  of  public  expenditure.  It  must 
be  remembered  that  in  all  these  cases  verification  by  appeal 
to  facts  is  required,  but  the  process  of  verification  is  ad- 
mittedly one  of  the  component  parts  of  the  deductive 
method.  On  the  whole,  the  study  of  Finance  will  force 
on  us  the  conclusion  that  '  induction  '  and  '  deduction  '  are 
not  so  much  opposed  as  complementary  methods,  each 
remedying  and  making  good  the  weakness  of  the  other. 

The  preceding  argument  holds,  to  some  extent,  of  even 
the  most  extreme  forms  of  the  two  methods.  Thus,  some 
—as  Macaulay — have  maintained  that  experiment  is  the 
really  fruitful  form  of  social  inquiry.  Now,  though  it  is 
evident  that  strictly  speaking  experiment  is  impossible  in 
respect  to  any  part  of  social  life,  since  we  cannot  bring 
about  that  isolation  of  a  particular  phenomenon  without 
which  no  experiment  can  be  conclusive,  it  yet  seems  true 
that  a  modified  form  of  experiment  may  give  a  probable 
result  that  will,  in  some  cases,  prove  of  great  practical  use. 
In  Finance,  for  example,  each  change  of  taxation  may  be 
regarded  as  an  experiment  in  the  popular  sense;  if,  to 
take  an  instance,  it  appeared  that  a  reduction  in  the  rates 
of  taxation  on  commodities  so  stimulated  consumption 
that  the  loss  in  revenue  through  the  reduction  was  made 
up  by  the  increase  in  the  quantities  used,  it  might  fairly  be 
said  that  the  policy  of  reducing  duties  was  experimentally 
justified,  notwithstanding  that  the  logical  conditions  for 
experiment  were  absent.  We  must,  however,  notice  that 
a  result  of  this  kind  cannot  safely  be  extended  to  fresh 
cases  unless  it  is  supported  by  more  general  considerations1. 

1  For  this  loose  use  of  experiment,  cf.  Jevons'  '  Experimental  Legislation  ' 


14  INTRODUCTION. 

The  advocates  of  the  mathematical  method  stand  at  the 
other  extreme.  There  is,  at  first  sight,  something  absurd 
in  suggesting  so  exact  a  mode  of  inquiry  in  a  subject  where 
very  many  complications  exist,  and  where  each  fact  is 
dependent  on  a  number  of  circumstances,  but  in  those 
parts  of  Finance  in  which  deduction  is  the  best  instrument 
of  research  it  may  prove  convenient  to  arrange  the  steps  of 
reasoning  in  a  mathematical  form ;  the  problem  will 
perhaps  be  thereby  more  easily  solved  or  its  exposition 
more  readily  followed1.  Where  the  conditions  can  be 
sufficiently  simplified,  and  where  it  is  important  to  develop 
the  quantitative  results,  this  procedure  is  probably  advis- 
able 2.  It  is,  however,  at  best  confined  to  a  very  limited 
area  and  needs  to  have  its  conclusions  tested  by  the  best 
statistical  results  available.  The  more  concrete  problems 
of  Finance  are  entirely  unamenable  to  this  rigid  and  precise 
method  of  treatment. 

§  10.  Having  thus  briefly  considered  the  questions  pre- 
liminary to  the  study  of  Public  Finance,  it  only  remains  to 
give  an  outline  of  the  course  of  our  further  inquiries.  After 
a  very  concise  account  of  the  historical  development  of 
financial  science  (Introduction,  Part  II)  we  shall  take  up  the 
subject  of  Public  Expenditure  and  its  principal  problems. 
(Book  I). 

Next  in  order  of  treatment  will  come  the  Public 
Revenues,  and  first  what  may  be  described  as  the  eco- 
nomic and  industrial  receipts  of  the  State  and  their  sub- 
divisions (Book  II).  The  examination  of  these  more 
primitive  forms  of  revenue  will  lead  up  to  the  discussion  of 
Taxation.  Owing  to  the  great  extent  and  complexity  of 

in  Methods  of  Social  Reform,  253  sq. ;    also  Newmarch,  Address  to  British 
Association  (section  F),  1861. 

1  It  is  interesting  to  notice  that  one  of  the  earliest  attempts  to  apply  mathe- 
matical methods  to  social  questions  was  in  regard  to  the  theory  of  taxation  by 
Canard  in  his  Principes  d*  £conomie  Politique,  Paris,  1801. 

2  See  for  good  examples  of  the  method  Auspitz  und  Lieben,  Untersuchungen 
iiber  die  Theorie  des  Preises,  and  M.  Pantaleoni,  Teoria  della  traslazione  dei 
tributi.    Fleeming  Jenkin,  'The  incidence  of  Taxes'  Works,  ii.  107-121. 


INTRODUCTION.  15 

this  topic  it  will  be  expedient  to  devote  a  separate  book  to 
the  principles  and  operation  of  Taxation  (Book  III),  re- 
serving for  distinct  treatment  the  study  of  special  taxes 
(Book  IV). 

The  questions  relating  to  revenue  having  been  thus  dis- 
posed of,  Book  V  will  deal  with  the  balance  of  expenditure 
and  receipts,  or,  in  other  words,  with  public  treasures  and 
public  debts. 

The  only  remaining  part  of  the  financial  system,  viz.  its 
mechanism,  administration,  and  control  will  form  the  subject 
of  a  final  book  (Book  VI). 

The  principal  features  of  'local  Finance'  will  be  ex- 
amined, each  in  its  appropriate  place, — local  expenditure 
in  Book  I,  local  taxation  in  Books  III  and  IV,  and  local 
indebtedness  in  Book  V. 


II. 

§  1.  Some  conception  of  the  gradual  formation  of  the 
modern  theory  of  Finance,  and  of  the  steps  by  which  it 
has  assumed  its  present  shape,  will  enable  the  student  to 
form  clearer  ideas  as  to  its  relation  to  other  branches  of 
social  inquiry,  and  the  real  meaning  of  those  parts  of 
earlier  systems  which  at  present  seem  to  have  little  or 
no  justification.  It  is  only  by  tracing  the  history  of  specu- 
lative thought  on  the  various  problems  of  Public  Finance 
that  we  can  fully  understand  the  way  in  which  errors  have 
been  gradually  eliminated,  and  incomplete  doctrines  have 
been  so  expanded  as  to  embrace  a  larger  portion  of 
truth. 

There  is  a  more  special  reason  for  this  preliminary 
historical  inquiry  in  regard  to  social  and  political  sciences. 
The  particular  stage  of  social  development  peculiarly 
affects  such  studies ;  their  cultivators  are  not  merely  like 
those  of  all  sciences  influenced  by  the  knowledge  and  ideas 
of  their  age,  but  the  very  phenomena  to  be  interpreted 


l6  INTRODUCTION. 

are  themselves  produced  by  and  dependent  on  the  condi- 
tion of  society.  It  is  this  feature  which  alone  can  fully 
explain  the  absence  of  financial  theory  at  periods  of  ap- 
parently high  civilization  and  culture. 

Our  historical  inquiry  has  at  present  to  be  limited  to 
what  is  known  as  the  *  external '  history  of  the  Science  of 
Finance,  i.  e.  to  an  outline  of  its  general  aspect  and  leading 
representatives  at  each  stage  of  its  growth.  Its  '  internal ' 
history  which  considers  the  origin  and  growth  of  the 
separate  doctrines  of  Finance  will  be  more  fitly  treated  in 
the  systematic  sections  of  the  work. 

§  2.  In  classical  antiquity,  though  the  need  of  revenue 
was  often  a  pressing  one,  and  though  at  least  under  the 
Roman  Empire  financial  administration  was  elaborately 
organized  *,  there  is  no  appearance  of  a  scientific  treatment 
of  financial  problems.  The  nearest  approach  to  discus- 
sion of  such  questions  is  found  in  Xenophon's  little  work 
on  the  Athenian  Revenues  and  modern  research  has  suc- 
ceeded in  collecting  stray  passages  from  classical  authors 
that  incidentally  deal  with  financial  questions  2.  There  is 
no  great  difficulty  in  accounting  for  this  neglect.  The 
causes  which  prevented  the  development  of  Economics 
equally  hindered  that  of  Finance.  The  whole  constitu- 
tion of  the  societies  of  Greece  and  Rome  was  based  on 
conceptions  directly  opposed  to  those  under  which  our 
modern  doctrines  have  been  formed.  With  them  the 
State  was  placed  above  and  before  the  individual,  who  was 
bound  to  sacrifice  himself  unreservedly  for  his  country. 
To  persons  holding  such  a  belief  the  question  of  just 
taxation  would  appear  to  be  of  trifling  importance.  That 
one  man  was  asked  for  2o°/o  of  his  income,  while  another 

1  The  parts  of  the  Theodosian  Code  dealing  with  administration  are  our 
principal  source  of  information  as  to  the  financial  system  of  the  later  Roman 
Empire.     See,  for  a  lucid  exposition  of  the  mechanism  of  Roman  Finance, 
Humbert's  Essai  sur  les  Finances  et  la  Comptabilite  publique  chez  les  Remains 
(Paris,  1886,  2  vols.).     The  standard  work  on  Athenian  Finance  is  Boekh, 
Staatshaiishaltung  der  Athener  (3rd  ed.  by  Frankel). 

2  E.g.  Tacitus,  Ann.  13.  31 ;  Pliny,  Pan.  37. 


INTRODUCTION.  J  7 

escaped  with  a  payment  of  io°/o  would  not  concern  those 
who  regarded  all  revenue  as  due  in  case  of  need  to  the 
State.  The  views  of  these  ancient  societies  in  respect  to 
public  expenditure  and  credit  were  vitiated  by  the  same 
notion  of  State  omnipotence l.  The  whole  organization  of 
classical  society  tended  to  confirm  this  belief:  both  in 
Greece  and  Rome  war,  and  its  product  slavery,  were  re- 
garded not  simply  as  permissible,  but  as  praiseworthy. 
Free  industry  was  consequently  placed  at  a  disadvantage, 
and  the  retardation  of  economic  development  which  inevit- 
ably resulted  did  not  allow  of  the  existence  of  those  institu- 
tions through  whose  agency  public  revenue  and  credit  can 
alone  be  successfully  promoted.  It  requires  some  knowledge 
of  economic  forces  to  see  that  state  Finances  depend  ulti- 
mately on  the  production  of  wealth  by  individuals,  and  that 
without  security,  and  a  just  division  of  public  burdens,  it 
is  impossible  to  expect  the  continuous  growth  of  the 
source  from  which  all  income,  public  and  private,  comes,  viz. 
the  effective  application  of  labour,  natural  agents,  capital 
and  invention  to  the  task  of  production.  The  history  of 
the  fall  of  the  Roman  Empire  is  but  one  long  illustration 
of  the  danger  of  neglecting  a  proposition  so  obvious  to  any 
modern  2. 

§  3.  The  mediaeval  period  shows  quite  as  little  trace  of 
financial  theory,  while  the  actual  organization  of  adminis- 
trative agencies  is  much  inferior  to  that  of  the  later  Roman 
Empire.  On  its  financial  side  the  so-called  feudal  system 
exhibited  a  surrender  of  the  public  claims  in  favour  of 
the  principal  lords.  Some  parts  of  the  Roman  arrange- 
ments survived,  but  they  were  gradually  transformed  until 

1  See  De  Coulanges,  La  Cif/  antique,  Bk.  iii.  ch.  18,  for  a  powerful  state- 
ment of  the  classical  ideas  respecting  the  relations  of  the  individual  and  the 
State. 

2  For  the  causes  hindering  the  rise  of  economic  science,  see  Ingram,  Hist,  of 
Pol.  Economy,  7-9  ;  for  Roman  ignorance  of  the  principles  of  taxation,  cf. 
Merivale,  Romans  under  the  Empire,  viii.  356  ;  and  for  the  obstructive  effects 
of  the   methods   employed   by  the  Empire,  Guizot,  Civilization  in  France, 
Lect.  2  ;  Clamageran,  Histoire  de  Pimpdt  en  France,  i.  89  sq. 

C 


i8  INTRODUCTION. 

the  sovereign  at  last  had  to  depend  on  his  own  property  for 
support,  with  whatever  supplement  might  be  derived  from 
the  fees  that  he  obtained.  It  necessarily  followed  that 
— even  were  the  intellectual  conditions  favourable — no 
theory  of  Finance  was  possible.  The  first  traces  of  a 
revival  of  method  in  practical  Finance  are  found  in  the 
German  and  Italian  cities,  which  in  many  respects  were 
free  from  external  control.  The  administration  of  the 
royal  income  forced  the  officials  of  the  feudal  State  to 
attend  to  the  details  of  financial  procedure,  but  of  theory 
or  even  precise  knowledge  there  is  no  appearance 1. 

§  4.  The  dissolution  of  the  Middle  Age  economy  both 
in  state  and  private  life,  and  its  replacement  by  the  modern 
system  marks  the  time  at  which  Finance  as  a  theoretic 
study  first  became  possible.  The  political  writings  of  the 
preceding  period  were  under  theological  influence,  and  even 
those  of  the  fifteenth  and  the  opening  of  the  sixteenth  cen- 
tury, more  especially  those  of  Macchiavelli  and  Sir  Thomas 
More  were  limited  by  their  dependence  on  the  ideas  of  clas- 
sical writers.  But  the  firmer  organization  of  the  centralized 
monarchies  of  France,  Spain,  and  England,  the  develop- 
ment of  money  dealings,  and  the  revolution  in  economic 
relations  produced  by  the  supplies  of  the  precious  metals 
from  the  New  World  presented  to  reflective  minds  a  series 
of  problems  which  could  not  be  solved  without  the  aid  of 
wider  conceptions,  and  accordingly  we  find  that  the  latter 
part  of  the  sixteenth  century  exhibits  a  new  development 
of  social  and  political  inquiry.  The  most  prominent  repre- 
sentative of  this  movement  is  the  French  writer  Bodin 
(1530-1596)  whose  Republic  appeared  in  French  in  1576, 
and  in  a  more  complete  form  in  Latin  in  1586.  Apart 
from  its  general  treatment  of  political  science  the  second 
chapter  of  the  sixth  book  of  the  work  contains  an  examina- 

1  For  one  example  of  mediaeval  city  finance  see  Schonberg,  Finanzverhdlt- 
nisse  der  Stadt  Basel  im  14.  und  15.  JahrJmndert .  The  Dialogus  de  Scaccario 
in  Stubbs'  Select  Charters,  168-248,  shows  the  processes  of  the  English 
Exchequer. 


INTRODUCTION.  ig 

tion  of  the  various'  forms  of  the  public  revenue ;  they  are 
grouped  under  seven  heads,  the  most  important  being 
(i)  the  public  domain,  (2)  import  and  export  duties,  and 
(3)  direct  taxation.  In  accordance  with  the  ideas  of  the 
mercantile  system  he  approves  of  customs  both  on  imports 
and  exports,  but  he  distinguishes  between  '  raw  materials ' 
and  *  manufactured  articles,'  advocating  high  export  dues 
on  the  former,  and  high  import  ones  on  the  latter.  Direct 
taxes  should,  he  thinks,  be  resorted  to  only  in  case  of 
necessity,  and  then  should  be  proportioned  to  '  faculty.' 
Taxes  on  luxury  he  regards  with  special  approval.  He 
condemns  the  many  exemptions  from  direct  taxation 
which  existed  in  the  France  of  his  time,  and  advises  a 
census  to  enable  charges  to  be  proportioned  to  property. 
His  influence  can  be  traced  in  the  German  financial  writers 
of  the  next  century  1. 

§  5.  The  predominance  of  the  set  of  conceptions  usually 
described  as  '  Mercantilism '  is  the  principal  condition 
affecting  the  growth  of  Finance  in  the  seventeenth  century. 
Political  economy  came  into  existence  as  a  collection  of 
practical  rules  for  the  guidance  of  statesmen2.  In  this 
aspect  it  is  described  by  Adam  Smith,  who  states  that  it 
'  proposes  two  distinct  objects ;  first  to  supply  a  plentiful 

revenue  or  subsistence  for  the  people ,  and  secondly 

to  supply  the  State  or  Commonwealth  with  a  revenue 
sufficient  for  the  public  service  3.'  The  latter  or  financial 
aim  was  particularly  developed  in  Germany.  Not  to 
dwell  on  the  writers  on  *  the  Treasury  '  and  *  on  Taxes '  in 
the  seventeenth  century,  who  show  some  advance  on  the 
views  of  Bodin 4,  there  is  the  '  Chamber  Science '  of  the 

1  The  fullest  account  of  Bodin  is  in  Baudrillart's  Jean  Bodin  et  son  Temps 
(Paris,  1853).   His  views  on  taxation  are  described  by  Clamageran,  ii.  314-330. 
For  English  readers,  Hallam,  Literature  of  Europe,  Part  II.  ch.  4.  §  2,  may 
be  noticed  as  giving  a  convenient  summary. 

2  Such  was  the  work  of  Antoine  Montcretien,  Traicte  d 'Economic  Politique 
(1615),  a  series  of  counsels  addressed  to  Louis  XIII. 

3  Wealth  of  Nations,  1 73. 

*  The  most  remarkable  of  these  writers  are  Faust,  Conring,  and  Klock.     AD 

C  2 


20  INTRODUCTION. 

eighteenth  century  which  presents  its  highest  form  in  the 
works  of  Justi  and  Sonnenfels.  The  former  writer  discusses 
financial  questions  both  in  his  Staatswissenschaft  (i755) 
and  his  Finanzwesen  (1766).  He  holds  that  taxation  should 
be  proportioned  to  property,  and  is  credited  with  the  crea- 
tion of  a  theory  of  the  so-called  Regalia,  but  his  real  service 
seems  to  have  been  the  placing  in  systematic  order  the 
views  prevalent  in  his  day  on  the  various  parts  of  Public 
Finance,  and  giving  such  matters  a  prominent  place  in  an 
exposition  of  political  science  1. 

In  France  financial  topics  received  a  different  treatment. 
The  organization  of  the  absolute  monarchy,  the  wars 
which  accompanied  it,  and  the  elaborate  and  many-sided 
commercial  policy  of  Colbert's  administration  (1661-1683) 
brought  about  a  state  of  things  that  effectively  marked  out 
the  line  of  thought  on  such  problems.  The  extraordinary 
brilliancy  and  apparent  prosperity  of  the  State  contrasted 
so  forcibly  with  the  extreme  misery  of  the  people  as  to 
give  reason  for  believing,  either  that  the  distribution  of 
taxation  was  unjust,  or  that  its  amount  was  excessive. 
The  French  people,  in  fact,  suffered  from  both  these  evils, 
and  it  was  in  the  advocacy  of  a  reformed  tax-system  that 
the  first  efforts  of  the  dissentients  from  the  prevailing 
mercantile  doctrine  were  made.  Vauban's  Dime  Royale 
(1707)  presents  a  melancholy  picture  of  the  condition  of 
France,  and  suggests  the  reform  of  taxation  by  abolishing 
most  of  the  existing  taxes  and  their  replacement  by  his 
proposed  '  royal  tithe' — a  single  direct  tax  often  per  cent, 
on  all  classes.  Here  we  notice  a  complete  departure  from 
the  more  superficial  view  of  the  earlier  writers,  who  espe- 
cially approved  of  taxes  on  commodities  as  encouraging 

attempt  has  been  made  by  Stein  (i.  125,  and  Finanzarchiv,  i.  I  sq.)  to  prove 
that  the  last-named  was  '  the  true  founder  of  the  theory  of  taxation,'  but  the 
bulk  of  his  work  seems  not  above  the  ordinary  mercantile  position,  and  his 
views  on  taxation  are  derived  from  Bodin.  He  has  been  further  accused  of 
copying  from  the  earlier  work  of  Faust.  See  also  Roscher,  Geschichte,  210  sq. 

1  For  Justi  see  Roscher,  Gesckichte,  444-465  ;  for  his  Finance,  461-65  ;  also 
Cohn,  §§  9,  71  ;  Meyer,  16-17  ;  Wagner,  i.  35-6. 


INTRODUCTION.  21 

industry,  and  a  clearer  appreciation  of  the  real  pressure 
of  taxation.  Boisguillebert,  both  in  his  Detail  de  la  France 
(1697)  and  his  Factum  de  la  France  (1707)  maintains  some- 
what similar  views,  more  particularly  as  to  the  superiority 
of  direct  taxation.  Both  may  be  regarded  as  precursors 
of  the  advocates  of  the  direct  single  tax  in  the  eighteenth 
century.  In  a  different  part  of  Finance  and  at  a  later  time 
Montesquieu  contributed  some  additions  to  the  received 
views.  The  i3th  book  of  the  Spirit  of  Laws  (1748)  is 
devoted  to  an  examination  of  the  political  side  of  taxation 
and  to  a  criticism  of  several  existing  taxes.  He  is  strongly 
in  favour  of  progressive  taxation,  influenced  probably,  as 
M.  Sorel  has  remarked  x,  by  the  practice  of  the  Athenians. 
It  is,  however,  in  showing  the  relation  of  the  system  of 
Finance  to  the  political  constitution  of  each  country  that 
Montesquieu  is  at  his  best ;  his  views  are  evidently  formed 
from  his  study  of  the  English  Constitution  which  provided 
more  efficient  safeguards  for  the  interests  of  the  subjects 
than  were  to  be  found  in  any  continental  State  2.  In  other 
respects  the  study  of  financial  problems  had  not  claimed 
much  attention  in  England.  The  pamphlet  literature  of 
the  seventeenth  century  had  handled  certain  special  points, 
but  the  pressure  of  taxation  was  not  such  as  to  lead  men 
to  look  for  remedies  against  its  evils.  The  rise  of  statistics 
under  the  name  of  *  political  arithmetic '  gave  an  impetus 
to  the  examination  of  the  facts  of  Finance  especially  in  the 
numerous  works  of  Sir  W.  Petty,  who,  in  company  with 
Locke,  considered  the  question  of  incidence  in  taxation. 
The  question  of  public  credit  was  discussed  by  Davenant, 
and  the  proposals  of  Dekker  and  Vanderlint  for  the  establish- 
ment of  a  single  tax  are  worthy  of  note  as  marking  the 
tendency  of  thought  3.  Two  of  Hume's  Political  Essays 

1  Montesquieu,  108. 

2  See  the  texts  of  Vauban  and  Boisguillebert  in  Les  £conomistes  Financiers 
du  XVIII<™  Stick  (ed.  Daire).   Also  Ingram,  57-9.  For  Montesquieu  cp.  Stein, 
i.  131-2. 

3  On  these  minor  writers  see   Ricca-Salerno,  Le  Dottrine   Finanziarie  in 
Inghilterra  ;  also  Vocke,  Finanzarchiv,  vii.  56. 


22  INTRODUCTION. 

(1752)  are  devoted  to  'Taxes'  and  '  Public  Credit.'  They 
show  traces  of  the  teaching  of  Montesquieu  on  the  political 
effects  of  financial  regulations,  but  also  a  far  greater  know- 
ledge of  the  economical  influence  of  taxation  and  credit. 
The  Physiocratic  doctrine  of  the  incidence  of  taxation  is 
rejected  by  Hume,  as  is  also  the  popular  view  that  national 
debts  were  beneficial.  A  few  years  later  than  Hume's 
Essays  appeared  the  Principles  of  Political  Economy  of  Sir 
James  Steuart  (1767),  embodying  the  teaching  of  the  Eng- 
lish mercantilists  in  a  systematic  form.  The  destruction 
of  the  system  which  it  advocated  prevented  the  work 
acquiring  any  influence  or  even  general  reputation,  though 
some  of  its  discussions  of  Finance  are  interesting  and 
suggestive  I. 

§  6.  The  changes  in  the  tone  of  thought  on  economic 
questions  and  the  position  of  society  facilitated  the  establish- 
ment of  the  first  scientific  school  of  social  philosophy — 
the  famous  group  or  '  sect '  of '  Aconomistes!  Most  of  their 
views  are  to  be  found  in  germ  in  earlier  writers,  but  they 
have  the  merit  of  presenting  them  in  a  definite  form.  It 
concerns  us  particularly  to  notice  that  one  of  their  cardinal 
doctrines — the  '  impot  unique ' — was  a  financial  one,  and 
that  financial  questions  occupied  a  great  deal  of  their 
attention.  However  widely  modern  writers  on  Finance 
may  differ  from  the  Physiocratic  conclusions,  they  must  at 
least  allow  that  their  selection  of  problems  was  a  good  one. 
With  very  defective  information  the  '  Economistes '  sought 
to  determine  the  question  of  justice  in  taxation  ;  its  real  as 
opposed  to  its  apparent  incidence,  and  its  effects  on  the 
growth  of  national  wealth  ;  their  analysis  of  the  sources  of 
revenue  and  of  the  extent  to  which  each  could  contribute 
to  the  public  requirements,  though  not  correctly  worked 
out,  yet  indicated  a  fruitful  line  of  research  for  later 
inquirers.  The  founder  of  the  school — Quesnay — has  dis- 
cussed taxation  in  his  Second  Probleme  Economique  and 

1  The  most  important  parts  of  Steuart's  Principles  so  far  as  Finance  is  con- 
cerned are — Book  iv.  part  4  (Public  Credit),  and  Book  v  (Taxes). 


Final 

birpl 

ecjual 

Vr     Th 


INTRODUCTION.  23 

several  of  his  Maximes  refer  to  Finance.  The  elder  Mira- 
beau,  one  of  his  most  ardent  disciples,  published  a  treatise 
on  '  taxation/  and  all  the  members  of  the  group  adopted 
the  belief  in  the  superiority  of  direct  taxation  on  the  net 
product  of  land  though  admitting  the  temporary  use  of 
other  taxes l.  By  far  the  most  illustrious  member  of  the 
school — though  in  some  particulars  he  dissented  from  their 
doctrines — was  the  statesman  and  philosopher  Turgot 
(1727-1781),  who  in  his  numerous  papers  on  questions  of 
Finance  has  shown  an  amount  of  practical  insight  com- 
with  theoretic  power  that  his  successors  have  rarely 
ailed  2. 

The  influence  of  the  Physiocrats  on  practical  Finance 
was  slight,  but  it  appears  that  the  Constituent  Assembly, 
(1789-91)  under  the  guidance  of  Du  Pont  de  Nemours, 
sought  to  partially  realize  their  idea  of  a  tax  on  the  '  net 
product '  from  land.  Their  action  on  the  progress  of 
speculation  has  been  much  more  powerful;  the  form  of 
many  financial  problems  in  modern  times  can  be  traced 
back  to  their  teaching,  and  their  leading  conceptions  have 
affected  the  Wealth  of  Nations  3. 

§  7.  The  great  reputation  and  the  permanent  merits  of 
Adam  Smith's  economic  and  financial  work  have  led  to  a 
perhaps  undue  depreciation  of  the  services  rendered  by  his 
predecessors,  but  it  is  hardly  questionable  that  in  Finance 
as  in  Economics  the  Wealth  of  Nations  was  far  superior  to 
any  earlier  work,  and  its  superiority  in  each  case  was  due 
to  the  same  qualities.  The  fifth  book — which  considers 
'  the  expenses  and  revenue  of  the  Sovereign '  shows  com- 

1  See  Physiocrates   (ed.    Daire),    128,   for   the   Second  Probleme.     Of  the 
Maximes,  Nos.  5,  27,  28,  29,  30,  relate  to  Finance.      For  the  latest  views  of 
Quesnay's  position,  see  S.  Bauer,  '  Zur  Entstehung  der  Physiocratie  ' ;  Conrad's 
Jahrbuchtr,  August  1890;  and  Quarterly  Journal  of  Economics,  v.  100  sq. ; 
also  Schelle,  Du  Pont  de  Nemours  (Paris,  1888). 

2  See  CEuvres  de  Turgot  (ed.  Daire)  ;  for  Finance  more  especially,  i.  389-632, 
ii.  368-432,  but  financial  questions  are  often  noticed  by  him  when  treating  of 
other  matters.     On  his  differences  from  Quesnay,  see  Schelle,  127  sq. 

3  For  the  influence  of  the  Physiocrats  on  the  financial  system  of  the  Revolu- 
tion, see  Stourm,  i.  128-130,  ii.  2-11  ;  Schelle,  319  sq. 


24  INTRODUCTION. 

prehensiveness  of  view,  felicity  of  illustration,  and  thorough 
understanding  of  the  practical  aspects  of  financial  problems, 
while  the  looseness  of  arrangement,  which  has  been  so 
often  censured,  is  less  evident  here  than  in  the  earlier  parts 
of  the  work.  It  is  quite  possible  for  critics,  irritated  by  the 
lavish  praise  bestowed  on  Adam  Smith  by  the  less  intelli- 
gent of  his  followers,  to  show  that  most  of  his  views  have 
been  set  forth  by  others  at  an  earlier  time :  the  Physiocrats 
may  have  had  a  firmer  grasp  of  the  narrower  premisses 
from  which  they  reasoned  :  the  technical  side  of  Finance 
may  have  been  more  exhaustively  handled  by  the  trained 
officials  of  the  German  States  ;  but  the  establishment  of 
any  or  of  all  these  propositions  does  not  invalidate  Adam 
Smith's  claim  to  be  the  greatest  of  theorists  on  Finance. 
Not  only  does  he  stand  in  the  centre  of  financial  develop- 
ment, summing  up  and  co-ordinating  the  work  of  the  pre- 
ceeding  century  in  its  various  lines  and  determining  the 
future  course  of  scientific  thought :  he  further  contributed 
an  important  element  to  the  science  of  Finance  in  his 
recognition  of  its  close  connexion  with  the  theory  of 
Economics.  It  was  by  bringing  out  clearly  that  the  solu- 
tion of  such  questions  as  the  incidence  of  taxation  depended 
on  the  economic  theory  of  the  distribution  of  wealth l  that 
he  affected  the  progress  of  the  science.  Moreover,  it  was  a 
renovated  political  economy  which  he  applied  as  a  solvent 
for  some  of  the  most  difficult  of  financial  problems.  His 
assaults  on  the  mercantile  system  effectually  deprived  it  of 
any  claim  to  be  the  accredited  economic  doctrine  of  Euro- 
pean thought,  and  replaced  it  by  a  more  accurate  body  of 
principles  influenced  by  far  different  views.  The  State 
appeared  as  but  one  among  the  several  claimants  on  the 
national  revenue,  which  was  the  product  of  individual 
energy  and  prudence  not  of  the  paternal  wisdom  of  states- 
men. This  alteration  of  aim  at  once  limited  and  rendered 
definite  the  province  of  Finance ;  instead  of  the  constant 

1  Cp.  Book  i.  chap.  6  (22)  with  Book  v.  chap.  2.  part  2  (347). 


INTRODUCTION.  25 

regulation  and  encouragement  which  Colbert  deemed  ne- 
cessary for  national  prosperity,  the  problem  was  narrowed 
down  to  maintaining  the  natural  conditions  of  society,  and 
applying  state-revenue  to  that  comparatively  simple  object. 
The  question  of  Finance  came  thus  to  occupy  a  larger  share 
of  attention  than  could  be  bestowed  on  it,  when  industry, 
art  and  morals  were  also  subjects  for  the  sovereign's  con- 
stant watchfulness  and  care.  It  may  have  been,  as  many 
German  writers  have  argued  1,  that  this  doctrine  bears 
the  marks  of  exaggeration  usual  in  all  reactions,  though 
their  view  of  the  case  is  not  completely  established,  but 
when  a  comparison  is  made  of  the  work  of  those  who  came 
under  Adam  Smith's  influence  with  the  systems  that  pre- 
ceded the  appearance  of  his  treatise,  we  can  say  that  any 
possible  loss  through  '  radical '  or  '  doctrinaire  dogmatism ' 
is  far  outweighed  by  the  removal  of  perplexing  fallacies 
and  the  establishment  in  their  place  of  broader  and  more 
philosophical  principles.  Finally,  the  value  of  each  part  of 
the  Wealth  of  Nations  is  so  bound  up  with  that  of  the 
substance  it  contains  that  it  is  only  in  studying  the  actual 
doctrines  of  Finance  that  we  can  form  a  satisfactory  judg- 
ment on  its  position. 

§  8.  The  Wealth  of  Nations  was  speedily  translated  into 
the  leading  European  languages  and  exercised  a  powerful 
effect  on  the  development  of  financial  doctrine,  but  the 
nature  of  its  influence  varied  with  the  condition  of  the 
different  countries  in  which  it  was  studied.  In  England 
where  its  action  on  practical  Finance,  at  first  great,  was? 
retarded  by  the  outbreak  of  the  French  Revolution  and  the 
unreasoning  conservatism  which  the  excesses  of  the  Jacobins 
confirmed  in  the  minds  of  the  ruling  classes  2,  the  principal 
stimulus  to  speculative  thought  was  found  in  his  analysis  of 

1  Cohn,  §§  11-12  ;  also  his  Grundlegung,  §§  74-79  ;  Geffcken,  in  Schonberg, 
22  ;  Wagner,  i.  40-1  ;  also  Ingram,  107-9. 

2  The  contrast  between  the  liberal  policy  pursued  by  the  younger  Pitt  in  the 
earlier  years  of  his  administration  and  his  later  measures  is  very  marked.     The 
Commercial  Treaty  with  France  in  1786  and  the  consolidation  of  the  Customs 
Laws  are  examples  belonging  to  our  subject. 


26  INTRODUCTION. 

the  operation  of  taxation  on  national  wealth.  This  part  of 
his  work  was  further  developed  in  Ricardo's  Principles  of 
Political  Economy  and  Taxation,  where  it  naturally  found  a 
place  as  an  application  of  the  revised  theory  of  distribution 
in  a  peculiarly  rigorous  and  abstract  manner 1.  This 
tendency  to  abstraction  led  to  a  division  of  the  treatment 
of  financial  questions  that  proved  very  unfortunate  for  the 
progress  of  the  science.  Writers  on  political  economy 
contented  themselves  with  general  and  rather  vague  dis- 
cussions as  to  the  influence  of  taxes,  while  the  facts  of  the 
existing  system  were  criticised  or  defended  in  numerous 
pamphlets  of  ephemeral  interest.  Even  works  of  greater 
merit,  such  as  Parn ell's  Financial  Reform  (1830)  and 
Sayer's  Income  Tax  (1831)  suffered  by  the  separation. 
The  nearest  approach  to  a  combination  of  the  different 
aspects  of  Finance  was  made  by  McCulloch  in  his  work  on 
Taxation  and  the  Funding  System  (1845,  3rd  ed.  1863), 
in  which  the  defects  are  more  apparent  to  modern  readers 
than  the  merits  which  at  the  time  it  undoubtedly  possessed. 
French  economists  and  financial  theorists  were  more 
impressed  by  the  negative  side  of  Adam  Smith's  teaching, 
a  tendency  that  was  much  strengthened  by  the  works  of 
J.  B.  Say — Traite  d  Aconomie  Politique  (1803),  and  Cours 
Complet  (1828) — who  was  disposed  to  undervalue  the  ser- 
vices of  the  State  even  in  the  discharge  of  its  neces- 
sary functions.  The  very  complicated  financial  system  of 
France  has,  however,  led  to  its  study  from  the  administra- 
tive point  of  view,  and  special  financial  questions  have 
received  much  more  attention  from  French  than  from 
English  economists.  There  are  numerous  treatises  on 
*  Taxation  '  and  '  Public  Revenue/  marked  by  a  general 
disposition  to  lay  stress  on  the  principles  of  natural  right 
and  justice  as  against  economic  expediency.  Most  French 

1  Ricardo,  chaps.  8-18  inclusive.  See  Wagner,  ii.  333,  and  Cohn,  §  248,  for 
recognition  of  his  work  in  this  respect.  In  another  department  of  Finance, 
R.  Hamilton,  by  his  work  on  The  National  Debt,  developed  and  added  to  the 
arguments  of  Adam  Smith,  and  was  followed  by  Ricardo. 


INTRODUCTION.  27 

writers  also  exhibit  a  strong  feeling  against  any  financial 
measures  believed  to  savour  of  socialism,  e.  g.  progressive 
taxation  or  even  an  income-tax.  With  rare  exceptions, 
such  as  the  work  of  Canard  already  mentioned,  they  show 
little  taste  for  deductive  reasoning  or  for  the  discussion  of 
questions  like  that  of  the  incidence  of  taxation  which  need 
its  use.  On  the  other  hand  they  are  prolific  in  historical 
and  statistical  works  such  as  those  of  Vuitry,  Clamageran, 
Stourm,  De  Parieu,  Vignes,  Audriffret,  and  others  ;  the 
great  but  incomplete  Dictionnaire  des  Finances,  issued 
under  M.  Leon  Say's  superintendence,  is  a  storehouse  of 
materials  on  French  financial  administration.  In  the 
convenient  work  of  Gamier,  Traite"  des  Finances  (4me  ed. 
1883),  and  the  more  brilliant  treatise  of  Leroy  Beaulieu, 
Science  des  Finances  (5rae  ed.  1892),  they  have  text-books 
of  a  high  order,  the  last-mentioned  work  in  particular 
being  remarkable  for  fulness  of  information  and  lucidity  of 
style.  Up  to  the  present  the  dislike  to  State  action  is  a 
distinctive  note  of  French  financial  work,  and  in  this 
respect  it  furnishes  a  useful  corrective  to  the  doctrines 
prevalent  in  Germany. 

§  9.  The  introduction  of  the  doctrines  of  the  Wealth  of 
Nations  into  a  country  where  the  older  traditions  of  the 
f  Chamber  Sciences '  were  so  strong  as  in  Germany, 
brought  about  a  re-casting  rather  than  an  abandonment 
of  the  earlier  methods.  The  masses  of  material  which 
writers  in  conformity  with  previous  usage  continued  to 
bestow  on  their  readers,  were  presented  from  the  new  point 
of  view.  Financial  questions  were  either  examined  in 
special  works,  or  were  assigned  a  separate  place  in  general 
economic  treatises  under  the  title  Finanzwissenschaft.  Pass- 
ing over  the  less  important  works  of  the  early  part  of  this 
century  V  we  come  to  the  treatise  of  K.  H.  Rau  on 
Economics,  the  third  volume  of  which,  devoted  to  Finance, 

1  Among  those  who  may  be  mentioned  are  Harl,  Krehl,  Fulda,  and  more 
especially  Jacob  {Finanzwissenschaft,  1821)  and  Malchus  (Finanz-wissenschaft, 
1830). 


28  INTRODUCTION. 

appeared  in  1832  (5th  ed.  1864).  The  merits  of  Rau's 
writings  lay  in  the  fulness  of  their  information,  and  in  their 
systematic  arrangement,  both  of  which  admirably  fitted 
them  for  use  by  students,  who  obtained  a  general  view  of 
the  science  as  accepted  at  the  time.  His  influence  in  pro- 
moting the  study  of  Economics  and  Finance  in  Germany  was 
great,  though  often  forgotten  by  his  successors  l.  Discussion 
of  his  doctrines  belongs  to  the  treatment  of  the  science,  but 
we  may  just  note  his  separation  of  '  fees '  (Gebiihren)  from 
'taxes'  (Steuerri),  and  his  recognition  of  the  influence  of 
administration  in  Finance.  The  monograph  of  Nebenius 
on  Public  Credit  (2nd  ed.  1829),  is  entitled  to  a  place 
beside  Rau's  more  comprehensive  work,  as  giving  a  full 
treatment  of  one  of  the  most  disputed  topics  of  Finance. 
Somewhat  later  in  date  is  Hoffmann's  Theory  of  Taxation 
(1840),  which  has  been  adversely  criticised  by  Roscher 
and  Wagner  on  account  of  its  unsystematic  character, 
but  which  nevertheless  has  had  considerable  effect  on  the 
progress  of  Finance.  It  appears  to  aim  at  giving  a 
scientific  justification  of  the  contemporary  fiscal  policy  of 
the  Prussian  State.  Many  other  German  writers  will 
require  attention  in  connexion  with  special  doctrines,  but 
the  older  school  of  Finance  that  was  more  or  less  closely 
limited  by  the  traditions  o1"  Adam  Smith's  teachings  in 
the  shape  in  which  they  had  been  arranged  by  Rau, 
presents  but  one  more  writer  for  consideration  at  present, 
Von  Hock,  who  examined  in  separate  works  the  financial 
systems  of  France  (1857),  and  of  the  United  States  (1867), 
and  also  wrote  on  Public  Revenue  and  Debts  (1863).  This 
work  includes  in  brief  compass  the  leading  questions  of 
taxation  and  indebtedness  ;  it  is  specially  good,  as  might 
have  been  expected  from  the  production  of  a  trained 
official,  in  its  discussion  of  administrative  points  2. 

1  See  Roscher,  Geschichte,  847  sq. 

2  For  fuller  examination  of  the  German  writers  of  this  period,  see  Wagner,  i. 
44-5,  ii.  7-9,  11-12  ;  Meyer,  §§  6-9,  13,  17,  18,  19;  Vocke,  10-33;  Falck, 
Lehre  von  der  Stetteruberwalzimg,  104-144. 


INTRODUCTION. 


29 


So  far  the  development  of  Finance  in  Germany  had 
been  carried  on  in  conformity  with  the  conceptions  of 
Adam  Smith  and  his  followers,  though  modified  in  some 
degree  by  the  peculiar  conditions  of  the  country;  but 
towards  the  middle  of  the  century,  new  forces  began  to 
act  on  the  social  sciences,  which  had  considerable  effect  on 
their  methods  and  doctrines.  Among  the  agencies  that  more 
particularly  influenced  financial  studies,  we  can  indicate 
three,  viz.  (i)  the  rise  of  the  '  historical '  school,  (2)  the  dis- 
position to  treat  Finance  as  a  part  of  administration  ( Ver- 
waltung)  in  the  newer  sense  of  that  term,  and  (3)  the  advo- 
cacy of  politico-social,  as  opposed  to  purely  financial  aims 
in  fiscal  matters.  The  historical  economists  did  not  contri- 
bute much  to  the  substance  of  financial  doctrine,  but  the 
importance  attached  by  them  to  distinctions  between  the 
different  stages  of  social  life,  and  their  assertion  of  the 
impossibility  of  laying  down  universal  precepts,  were  evi- 
dently applicable  with  peculiar  force  to  the  systems  of 
taxation  existing  in  different  countries.  Their  belief  that 
the  present  could  be  fully  understood  only  in  the  light  of 
the  past  made  it  desirable  to  study  the  history  of  financial 
arrangements,  and  some  of  the  best  work  of  German 
Finance  has  been  in  this  direction  *.  Some  supporters 
of  the  school,  in  particular  Schaffle  and  Schmoller,  went 
further  and  assailed  such  cardinal  doctrines  of  received 
financial  theory  as  that  of  '  net  income  being  the  sole 
fund  on  which  taxation  could  fall/  and  this  questionable 
position  was  supported  by  arguments  which  led  to  a  closer 
study  of  fundamental  principles  in  Finance 2.  To  Stein  is 
due  a  movement  towards  regarding  Finance  as  a.  problem 
of  administration.  His  Finanzwissenschaft  (5th  ed.  4  vols. 
1885-6),  much  modified  and  expanded  in  its  later  editions, 

1  Such  as  the  already  mentioned  work  of  Schonberg,  Finanzvcrhaltnisse  der 
Stadt  Basel  (1879);  Schmoller,  Die  Epochen  der  preussischen  Finanzpolitik ; 
Zeumer,  die  deutschen  Stadtesteuern  ;  Vocke,  Geschichte  der  Steuern  der  Brit. 
Reiche. 

2  Schaffle,  Gesammelte  Aufsdtze,  i.  158-183,  esp.  167  sq.;  Schmoller,  'Die 
Lehre  vom  Einkommen  '  (Zeitschrift fiir  Gesammte  Staatswissenschaft,\%6i) 


30  INTRODUCTION. 

contains,  along  with  a  great  deal  that  is  disputable  and 
fanciful,  a  full  treatment  of  financial  organization.  The 
State  and  its  administrative  organs  is  in  his  view  the 
basis  of  Finance,  and  the  history  and  statistics  of  European 
Finance  receive  considerable  attention.  More  important, 
from  a  practical  standpoint,  than  the  influence  of  Stein  is  the 
tendency  to  regard  the  financial  system  as  an  agency  for 
redistributing  wealth.  This  position,  supported  most  pro- 
minently by  Wagner  \  is  not  fully  accepted  by  other 
economists  and  financial  writers,  but  in  several  works 
propositions  are  set  forth  which  need  this  politico-social 
view  of  Finance  as  their  logical  basis. 

The  result  of  these  several  influences  has  been  to  give  a 
special  tone  to  German  financial  work,  since  even  where  the 
newer  ideas  are  not  accepted,  they  are  present  to  the  writer's 
mind.  This  change  in  attitude  towards  financial  problems  is 
the  outcome  of  beliefs  which  may  briefly  be  enumerated  as 
follows  :  (i)  Public  Finance  is  a  matter  of  national  interest, 
it  is  not  merely  a  distribution  of  burdens  among  the  in- 
dividual citizens,  who  owe  duties  to  the  State  which  it 
ought  to  be  their  privilege  to  discharge  ;  (2)  Financial  ad- 
ministration is  largely  dependent  on  national  peculiarities. 
Each  country  has  or  needs  a  system  suited  to  itself,  so 
that  the  idea  of  a  single  '  rational '  system  of  taxation  is 
absurd  ;  (3)  The  same  conception  of  relativity  applies  to 
the  history  of  Finance  ;  earlier  systems,  e.  g.  the  Roman, 
have  to  be  judged  in  relation  to  the  circumstances  of  the 
age  in  which  they  existed. 

Instead  of  attempting  to  criticise  the  opinions  and 
tendencies  just  described,  we  have  rather  to  notice  the 
remarkable  productiveness  which  has  been  the  outcome  of 
the  study  of  Finance  in  Germany.  Either  in  respect  to 
general  text-books  and  manuals  or  to  monographs  on  the 
most  complicated  questions  she  holds  the  first  place.  Of 
the  former,  in  addition  to  the  previously  noticed  work  of 
Stein,  there  are  :  the  very  extensive  treatise  of  Wagner — 

1  Especially  i.  48-50,  ii.  449. 


INTRODUCTION.  3! 

still  incomplete — in  which  each  aspect  of  Finance  is  handled 
at  even  undue  length ;  the  shorter  and  more  lucid  work  of 
Cohn,  where  the  evolution  of  financial  systems  is  brought 
out  by  description  rather  than  by  brief  and  precise  pro- 
positions ;  the  less  attractive  manual  of  Roscher  which,  how- 
ever, gives  a  collection  of  the  various  opinions  and  a* mass 
of  interesting  historical  detail ;  and  lastly,  the  compact 
and  conservative  work  of  Umpfenbach,  exhibiting  some  of 
the  best  qualities  of  the  older  writers.  Almost  reaching 
the  character  of  general  manuals  are  the  more  limited 
treatises  of  Schaffle,  Neumann,  Sax,  and  Vocke.  Among 
special  works  there  is  the  collection  of  monographs  in  the 
third  volume  of  Schonberg's  Handbuch — which  had  best 
be  regarded  in  that  light — and  numerous  smaller  studies 
on  such  questions  as  'progressive  taxation'  (Neumann), 
4  incidence  of  taxation'  (Falck,  Kaizl),  'justice  in  taxa- 
tion' (Meyer),  'the  exemption  of  the  minimum  of  sub- 
sistence '  (Schmidt).  When  the  abundant  periodical  litera- 
ture appearing  in  the  journals  of  Conrad,  Schmoller,  and 
Schanz — the  last  devoted  exclusively  to  Finance — is  added, 
we  can  form  some  idea  of  the  activity  of  German  workers 
in  Finance. 

§  10.  At  a  comparatively  early  period  questions  relating 
to  public  revenue  and  expenditure  had  attracted  attention 
in  Italy.  The  work  of  Broggia  (1743)  is  commended  by 
Cossa,  and  several  of  the  economists  of  the  latter  half  of 
the  eighteenth  century,  examined  the  effects  of  taxation, 
and  especially  of  those  taxes  actually  levied  in  their 
country.  The  influence  of  Adam  Smith  and  J.  B.  Say, 
was  for  a  long  time  predominant  in  Italy  as  elsewhere. 
The  development  of  financial  science  in  Germany  has, 
however,  deeply  affected  the  more  modern  writers,  who 
have  zealously  devoted  themselves  to  an  examination  of 
financial  subjects,  bringing  to  bear  on  their  selected  topics 
considerable  independence  of  mind,  and  at  the  same  time, 
a  thorough  acquaintance  with  what  has  been  already  ac- 
complished. More  especially  may  be  mentioned  the  brief 


32  INTRODUCTION. 

and  condensed  manuals  by  Cossa  (already  referred  to), 
and  by  Ricca-Salerno,  with  the  latter  author's  writings  on 
special  parts  of  Finance  ;  the  recent  works  of  Viti  de  Marco, 
Mazzola,  and  Zorli,  on  the  more  fundamental  principles  of 
the  science  in  connexion  with  the  Value  theory  of  Jevons 
and  Menger  ;  the  study  of  Pantaleoni  on  the  'repercussion' 
of  taxation,  the  similar  work  of  Conigliani,  and  the  very 
complete  investigation  of  Italian  Finance  by  Alessio l. 

§11.  There  has  been  far  less  interest  in  financial  studies 
in  English  speaking  countries.  Since  the  last  edition  of 
McCulloch's  work  no  treatise  has  appeared  that  could  even 
pretend  to  be  a  '  Manual  of  Finance.'  English  taxation 
has,  indeed,  been  discussed  in  such  books  as  those  by  Peto 
(1863),  Levi  (1860),  and  Noble,  and  special  questions  have 
received  consideration  from  Jevons,  Dudley  Baxter,  Cliffe 
Leslie,  Thorold  Rogers,  and  Mr.  Palgrave  2.  In  the  last  few 
years  the  historical  aspects  of  the  English  system  have  been 
elucidated  by  Messrs.  Sydney  Buxton,  Dowell,  and  Hall 3. 
Some  of  the  most  valuable  contributions  to  the  statistics 
and  theory  of  Finance  are,  however,  buried  in  the  volumes 
of  Parliamentary  papers,  such  as  the  Report  on  Import 
Duties  (1840),  the  Inquiries  on  the  Income  Tax  (1852-3, 
1861),  and  on  Local  Taxation4.  The  speeches  of  finance 
Ministers,  and  the  debates  on  financial  measures  are  also 
instructive  to  the  student,  though  practically  unknown 
unless  where,  as  in  Mr.  Gladstone's  case,  reprinted. 

In  the  United  States  there  has  been  till  recently  a  similar 
neglect ;  but  the  rapid  growth  of  economic  science  in  that 
country  has  already  extended  to  Finance.  Thus  we  have 

1  For  further  details,  Cossa,  Guida  allo  Studio  delf  Econotnia  Politico.,  ch.  7  ; 
also  his  Scienza  delle  Finanze  (Am.  Trans.),  10  and  181-193  (a  Bibliography) ; 
Ricca-Salerno,  Storia  delle  dottrine  finanziarie  in  Italia  (1881). 

2  Prof.  Nicholson's  article  on  '  Taxation '  in  the  Encyclopaedia  Britannica 
should  be  added. 

3  S.  Buxton,  Finance  and  Politics  (2  vols.  1888";  S.  Dowell,  A  History  of 
7^axation  and  Taxes  in  England  (2nd  ed.  4  vols.  1888) ;  H.  Hall,  A  History 
of  the  Custom  Revenue  in  England  (1885). 

4  Goschen,  Local  Taxation,  where  his  report  is  reprinted. 


INTRODUCTION.  33 

a  valuable  monograph  on  Public  Debts  by  Professor 
Adams,  Dr.  Ely's  Taxation  in  American  States  and 
Cities,  the  learned  and  instructive  articles  of  Dr.  Seligman, 
and  a  large  number  of  minor  contributions  dealing  with 
special  points  of  history  or  theory  in  either  federal  or 
state  Finance.  America,  like  England,  is  rich  in  official 
reports  and  collections  of  evidence  on  financial  matters, 
though  this  material  is  hardly  available  for  the  European 
student.  With  regard  to  both  England  and  America,  it 
may  be  predicted  that  there  will  be  a  much  larger  contri- 
bution to  financial  literature  in  the  coming  years. 


BOOK    I. 


PUBLIC  EXPENDITURE. 


D  2 


CHAPTER    I. 

STATE  ECONOMY.    GENERAL  CONSIDERATIONS. 

§  1.  THE  question  of  the  nature  and  amount  of  public 
outlay  forms,  as  we  have  seen,  one  of  the  cardinal  branches 
of  Finance;  it  has  an  important  influence  on  the  other 
departments  of  the  subject,  and  may  be  regarded  as  the 
final  object  of  the  financial  system.  In  order  to  estimate 
correctly  the  expenditure  of  any  given  society  for  state  or 
public  purposes,  it  is  desirable  to  see  the  general  features  of 
the  agency  which  so  applies  this  part  of  national  wealth. 
Most  persons  are  familiar  with  the  conception  of  a  state 
economy,  and  are  even  prepared  to  adopt  the  view  prevalent 
among  students  of  social  science,  that  Society  is  an  organism 
with  an  independent  life,  manifesting  itself  in  the  exercise 
of  different  functions,  one  set  of  which  has  been  specialized 
in  the  regulating  organ  or  the  State.  Without  pressing 
this  resemblance  so  far  as  is  sometimes  done  *,  we  may 
accept  the  evident  fact  that  the  state  organization  has 
certain  points  of  analogy  with  the  arrangements  of  the 
individual,  and  that  in  regard  to  economic  action  the  com- 
parison is  particularly  close.  The  individual  and  the  State 
have  each  receipts  and  expenditure.  Each  endeavours,  or 
should  endeavour,  to  obtain  the  greatest  result  with  the 
smallest  effort  ;  for  each  it  depends  on  the  relation  between 
these  economic  categories,  whether  wealth  is  being  accu- 

1  E.  g.  Mr.  Spencer,  Principles  of  Sociology,  Part  ii. 


38  PUBLIC  FINANCE.  [BOOK  I. 

mulated  or  debt  incurred ;  and  for  each  a  careful  method 
of  keeping  accounts  is  needed  as  a  safeguard  against  errors. 
There  is,  however,  a  still  closer  parallel  to  be  found  in  the 
case  of  those  associations  formed  for  the  accomplishment  of 
certain  special  ends  which  are  usually  known  as  'juristical 
persons '  or  corporations.  From  the  ordinary  private  part- 
nership, through  the  local  trading  company,  the  progres- 
sion can  be  traced  up  to  such  a  body  as  the  East  India 
Company,  that  in  some  respects  was  sovereign  all  but  in 
name.  In  all  these  associations  the  principal  financial 
phenomena  are  exhibited  in  a  similar  manner,  and  in  a 
way  that  helps  to  explain  the  character  of  state  Finance. 
The  existence  of  such  general  resemblances  should  not, 
however,  conceal  from  us  the  fact  that  public  agencies  are 
in  some  essential  points  distinct  from  the  c  economy '  of 
the  individual  or  of  the  association.  It  is  the  presence  of 
these  special  and  peculiar  features  that  renders  the  exami- 
nation of  state  economy  needful  in  treating  of  Public 
Finance. 

|  §  2.  The  first  distinctive  point  in  the  public  or  state 
economy  is  its  compulsory  character.  The  individual  or 
private  association  has  to  submit  to  limits  other  than  those 
of  his  or  its  own  will,  but  so  far  as  legal  restraints  are  con- 
cerned, the  State  stands  above  them  in  a  position  of  inde- 
pendence. /  It  is  entitled  to  claim  all  the  services  and 
property  of  its  subjects  for  the  accomplishment  of  whatever 
aims  it  prescribes  to  itself.'  When  stated  in  so  rigid  a 
form,  the  proposition  is  likely  to  awaken  dissent,  and 
yet  from  the  strictly  legal  and  administrative  point  of 
view,  it  is  a  commonplace  since  the  time  of  Austin  l.  The 
effectual  limits  to  state  action  depend,  not  on  any  legal  or 
administrative  rules,  but  on  the  difficulty  of  overcoming  the 
obstacles  set  by  external  nature,  and  the  sentiments  of  its 
subjects.  Its  expenditure  and  the  objects  to  which  it  is 
directed,  are  bounded  by  the  productiveness  of  the  national 

1  See  his  Province  of  Jurisprudence  determined,  and  for  earlier  statements  of 
the  same  truth,  Hobbes,  Leviathan,  ch.  18 ;  Bodin,  De  Republica,  Bk.  i.  ch.  7. 


CHAP.  I.]  STATE   ECONOMY.  39 

industries,  and  the  facility  with  which  the  national  wealth 
can  be  obtained  through  taxation  for  public  use.  The 
compulsory  nature  of  state  action  is,  then,  a  trait  which 
marks  it  off  from  the  individual  or  the  private  society. 
JJ>  A  second  point  of  difference  appears  in  the  ends  to  be 
attained  through  state  agencies.  They  are  mainly,  as 
Roscher  remarks  1,  of  an  immaterial  kind :  the  protection 
of  the  society  against  aggression,  or  internal  disturbance, 
and  the  promotion  of  progress  in  civilization,  are  hardly 
capable  of  being  definitely  measured  and  assigned  a  precise 
value,  nor  even  if  they  were,  could  the  share  of  each  indi- 
vidual be  allotted  to  him  in  the  exact  proportion  that  he 
was  willing  to  pay  for  it.  The  force  of  the  State  must  I 
prescribe  what  is  to  be  paid  by  its  subjects  as  a  body,  and ' 
the  share  that  shall  be  borne  by  each.  As  regards  expendi- 
ture, the  absence  of  a  strict  standard  makes  it  very  hard  to 
judge  the  extent  to  which  the  public  resources  should  be 
applied  for  the  satisfaction  of  the  several  wants.  This 
vagueness  is  made  still  more  apparent  by  confining  our 
attention  to  a  single  public  need  in  a  given  country — say, 
the  amount  of  protection  against  foreign  and  home  enemies 
required  by  England  at  present.  How  shall  we  determine 
the  expenditure  that  is  suitable  for  this  object  ? 

6  Adequacy  in  such  cases,'  says  Dr.  Sidgwick,  *  cannot  be 
defined  by  a  sharp  line.  Most  Englishmen  are  persuaded 
that  they  at  present  enjoy  very  tolerable  protection  of 
person  and  property  against  enemies  within  and  without  the 
country,  but  it  would  be  difficult  to  argue  that  our  security 
would  not  be  enhanced  by  more  and  better-paid  judges 
and  policemen,  or  more  and  better-equipped  soldiers  and 
sailors  V 

The  problem,  it  is  evident,  can  only  allow  of  an  approxi- 
mate solution,  such  as  the  actual  circumstances  will  permit, 
and  this  finds  its  expression  in  the  sentiment  of  practical 
statesmen,  who  say  with  Sir  R.  Peel,  '  In  time  of  peace  you 
must,  if  you  mean  to  retrench,  incur  some  risk.' 

1  §  109.  2  Political  Economy,  543-4  (ist  ed.). 


40  PUBLIC    FINANCE.  [BOOK  I. 

When  the  problem  is  widened  so  as  to  include  the  rela- 
tions of  the  several  wants  of  the  public  organs  of  the  society, 
its  difficulty  is  increased  ;  the  adjustment  of  the  separate 
items  of  outlay  and  the  proportion  that  the  total  amount 
shall  bear  to  the  sum  of  national  revenue,  is  a  task  that 
tries  the  abilities  of  the  most  skilful  administrator. 

'In  connexion  with  the  direction  of  public  expenditure,  a 
third  feature  of  public  economy  comes  into  prominence  ; 
one  which,  it  is  true,  may  in  some  degree  be  found  in  private 
associations,  but  in  a  very  restricted  form.  That  is  th 
existence  of  special  interests  opposed  to  the  general  welfar 
It  goes  without  saying  that  the  individual  desires  what  he 
deems  to  be  for  his  own  good,  and  in  most  private  companies 
the  shareholders  wish  for  the  prosperity  of  the  institution 
in  which  their  capital  is  invested.  There  are,  however, 
cases  where  the  holder  of  a  few  shares  may  make  a  gain 
indirectly,  through  some  action  of  his  company,  which  will 
lower  its  dividends,  and  being  so  far  c  an  economic  man/ 
he  may  vote  for  and  advocate  that  course.  Instances  of 
the  kind  are  not  very  common,  and  the  power  possessed 
by  persons  in  the  situation  just  described  is  so  slight  that  it 
may  be  neglected.  The  state  organization  is  differently 
placed.  '  Sinister  interests '  exercise  a  good  deal  of  control 
on  its  actions.  There  are  large  classes  whose  aim  it  is  to 
increase,  not  to  reduce,  the  public  expenses.  More  par- 
ticularly is  this  true  of  salaried  officials,  who  readily 
advocate  increased  outlay,  but  offer  a  determined  opposi- 
tion t-j  any  savings1.  Military  and  naval  officers  are 
extremely  anxious  to  insist  on  the  importance  of  increasing 
our  land  and  sea  forces  in  order  to  secure  a  better  system 
of  defence.  Every  additional  outlay  unfortunately  fails  to 
attain  this  object,  which  seems  as  far  off  as  ever. 

Reaction  against  the  evils  produced  by  these  tendencies 
has,  iii  England  at  least,  raised  up  an  opposite  school  of 

1  '  Each  public  department  stands  prepared  to  give  the  most  confident  reasons 
why  it  is  absolutely  necessary  to  keep  up  the  scale  of  its  expenditure  to  the 
exact  point  at  which  it  now  is.'  Parnell,  Financial  Reform,  100. 


CHAP.  I.]  STATE    ECONOMY.  4! 

extremists,  who  are  opposed  to  even  the  outlay  required 
for  real  efficiency.  The  inherent  difficulties  of  the  state 
economy  are  thus  intensified  by  conflicts  of  interest  and 
sentiment  which,  if  not  peculiar  to  it,  at  all  events  are  most 
prominently  exhibited  in  its  working. 

A  fourth  point  of  difference  between  the  economy  of  the 
individual  and  that  of  the  State,  is  shown  in  the  determi- 
nation of  the  area  of  work  for  each.  The  citizen  will 
naturally  adopt  the  most  profitable  employment  open  to 
him,  or  if  it  should  seem  expedient,  he  will  combine  several 
different  occupations.  The  interest  of  others  is  a  very 
secondary  consideration  ;  his  activities,  their  sphere  and 
extent,  will  depend  on  the  '  net  advantages '  to  be  gained. 
His  investments  of  capital  will  be  similarly  determined. 
Within  the  customary  limits  of  law  and  morality  he  will 
seek  to  make  his  advantages  as  great  as  possible.  The 
field  of  state  action  has  to  be  mapped  out  on  different 
grounds.  The  fact  that  a  particular  business  or  part  of 
social  action  could  be  managed  by  the  State  without 
economic  sacrifice,  does  not  prove  that  it  should  be  handed 
over  to  public  agency.  It  is  in  general  a  sound  practical 
rule  that  'the  State  should  not  interfere  with  private  enter- j 
prise/  and  whatever  be  the  theoretical  qualifications  needed, 
it  is  plain  that  even  its  partial  truth  limits  the  operations 
of  the  public  power.  The  existence  and  constant  working 
of  individual  and  associated  '  economies '  (Privatwirth- 
sckaften]  beside  and  -under  the  protection  of  the  great 
compulsory  economy  (Zwangwirthschaft]  of  the  State,  is  a 
point  which  should  never  be  forgotten. 

Fifthly,  a  private  economy  differs  from  that  of  the  State 
not  only  in  the  limitation  of  its  area  of  action,  but  in  the 
object  of  its  working.  It  seeks  to  obtain  a  profit  from  its 
operations ;  in  the  language  of  Finance  it  aims  at  a  '  sur- 
plus.' The  individual  or  company  who  just  makes  ends 
meet  at  the  close  of  the  year1  is  not  in  a  prosperous 

1  I.  e.  allowing  only  necessary  expenses  for  the  individual,  anything  above 
being  manifestly  profit. 


42  PUBLIC   FINANCE.  [BOOK  I. 

condition.  Something  more  is  required  to  give  a  fund  for 
expenses  beyond  the  necessary  minimum  in  the  former 
and  for  dividends  in  the  latter  case.  The  greater  the 
surplus  the  more  successful  is  the  result  deemed  to  be. 
The  ideal  of  state  economy  is,  on  the  contrary,  to  establish 
a  balance  between  receipts  and  expenditure.  A  State 
that  has  very  large  surpluses  is  as  ill-managed  as  one  with 
large  deficits1.  The  practical  rule  is  to  aim  at  a  slight 
excess  of  receipts  over  outlay  in  order  to  prevent  the 
chance  of  a  deficit.  The  position  of  the  State  as  drawing 
its  resources  from  the  contributions  of  the  several  private 
economies  under  its  charge  is  the  reason  for  this  course  of 
conduct. 

The  last  of  the  points  of  difference  usually  noted  is 
rather  apparent  than  real ;  it  results  from  the  mode  adopted 
in  regulating  state  Finance,  but  in  fact  state  and  private 
economy  here  fundamentally  agree.  The  private  person 
must,  it  is  said,  regulate  his  expenditure  by  his  income ; 
the  State  regulates  its  income  by  its  expenditure.  Such  is 
in  form  the  common  mode  of  determination.  The  in- 
dividual says,  '  I  can  spend  so  much : '  the  finance  minister 
says,  *  I  have  to  raise  so  much.'  On  looking  more  care- 
fully into  the  matter,  we  discover  that  a  certain  amount 
of  expenditure  is  necessary  to  support  individual  life,  and 
that  each  person  must  procure  that  amount  at  least 
under  peril  of  death.  For  all  classes  above  the  lowest 
this  minimum  of  expenditure  rises  to  a  higher  point  and 
increased  outlay  is  essential  for  the  obtaining  of  increased 
income2.  On  the  other  side  state  expenditure  is  not 
definitely  fixed,  it  has  to  be  determined  by  various  con- 
siderations, one  of  which  is  the  pressure  that  its  discharge 
will  place  on  the  national  resources.  We  can  easily  con- 
ceive the  United  States  wisely  incurring  expenditure  that 
an  Indian  administration  would  as  wisely  avoid  3. 

1  Cp.  the  recent  difficulties  of  the  United  States  with  their  surplus  revenue. 

2  Marshall,  Principles  of  Economics,  i.  134  (ist  ed.). 

3  Roscher,  §  109  ;  Wagner,  i.  9-16  ;  Geffcken  in  Schonberg,  6. 


CHAP.  I.]  GENERAL  CONSIDERATIONS.  43 

§  3.  Though  the  several  characteristics  that  we  have 
been  engaged  in  noticing,  mark  clearly  the  distinct  and 
peculiar  aspect  of  public  economy,  we  have  still  to  con- 
stantly bear  in  mind  that  the  consumption  of  wealth  for 
public  ends  is  a  part  of  the  consumption  of  wealth  in  general. 
As  a  study  of  human  wants  must  prove  the  basis  of 
the  economic  theory  of  consumption,  so  must  an  examina- 
tion of  the  number  and  order  of  state  wants  be  an  essential 
part  of  our  present  inquiry. 

The  classification  most  familiar  to  English  readers  is 
that  of  J.  S.  Mill  who  distinguishes  between  the  *  necessary * 
and  the  '  optional '  functions  of  government l.  The  value 
of  this  division  is,  however,  much  impaired  by  his  sub- 
sequent admission  that  no  employment  of  state  agency 
can  ever  be  purely  optional,  as  also  by  the  further  con- 
cessions made  in  his  examination  of  the  limits  of  laissez 
faire.  The  arrangement  suggested  by  Roscher  is  more 
in  analogy  with  the  case  of  private  outlay,  viz.  that  into 
(i)jiec£5saryj  (2)  useful,  and  (3)  superfluous  or  ornamental 
expenditure2,  corresponding  to  the  necessaries,  decencies, 
and  luxuries  of  individual  consumption.  It  does  not 
require  much  acumen  to  add,  that  the  first  head  is  un- 
avoidable, that  there  is  generally  a  presumption  in  favour 
of  the  second,  while  there  is  always  one  against  the  last. 
The  formation  of  such  general  categories  as  the  foregoing 
does  not  help  to  solve  the  real  difficulties  of  the  matter. 
The  terms  used  to  describe  the  groups  just  mentioned 
carry  with  them  an  already-formed  judgment.  By  placing 
a  particular  form  of  expense  under  the  heading  of  '  neces- 
sary '  or  of  *  ornamental '  outlay,  we  have  pronounced  an 
opinion  on  its  merits  or  demerits.  It  still  remains  to 
settle — and  this  is  by  far  the  most  troublesome  part  of  our 
task — the  several  items  to  be  placed  under  each  head. 
In  order  to  meet  this  difficulty  we  find  it  necessary  to 
consider  the  proper  functions  of  the  State,  and  how  far  it  , 

1  Principles,  Bk.  v.  ch.  i.  §  i.     Cp.  ch.  u.  passim.  2  §  109. 


44  PUBLIC   FINANCE.  [BOOK  I. 

is  bound  to  discharge  each  and  all  of  those  functions 
under  circumstances  of  financial  pressure.  One  of  two  pos- 
sible lines  of  inquiry  may  be  adopted.  Starting  from  our 
conception  of  the  State,  we  may  seek  to  determine  the 
proper  sphere  of  its  action,  and  the  amount  of  its  justifi- 
able outlay  within  that  sphere,  using  either  general  reason- 
ing or  appeals  to  specific  experience  as  our  guide.  Or  we 
may  prefer  to  trace  the  development  of  public  tasks  and 
endeavour  by  following  their  direction  in  the  past  to  form 
an  estimate  of  their  present  position  and  probable  future. 
It  may  even  be  expedient  to  combine  the  two  courses  of 
inquiry,  using  each  as  the  corroborator  or  corrective  of  the 
other.  Here,  as  often  elsewhere,  the  historical  or  inductive 
method  comes  in  to  support  and  check  the  conclusions  of 
deduction. 

§  4.  The  primitive  theory  of  politics,  if  theory  it  can  be 
called;  accepted  the  omnipotence  of  the  State  as  a  leading 
principle.  The  legislator  was  to  fashion  the  society  in  the 
mould  which  seemed  to  him  best ;  the  very  idea  of  indi- 
vidual claims  had  no  place  in  such  a  doctrine.  In  its 
passage  through  feudalism  European  society  obtained  the 
idea  of  private  liberty,  though,  owing  to  the  imperfect  state 
organization  of  the  period,  the  effect  that  might  naturally 
be  expected  was  not  produced.  The  centralized  mon- 
archies which  succeeded  the  mediaeval  system  claimed  the 
privilege  of  regulating  individual  action  in  a  mode  that  in 
some  respects  recalled  classical  antiquity.  The  religious 
and  political  struggles  of  the  sixteenth  and  seventeenth 
centuries  were  the  result  of  their  undue  activity  in  those 
domains  of  human  life.  Commerce  and  industry  did  not 
assert  their  right  to  freedom  till  a  later  period.  State 
regulation  of  industry  found  its  highest  expression  in  the 
so-called  mercantile  system  of  the  seventeenth  century,  and 
particularly  in  the  administration  of  Colbert 1.  The  re- 
action against  this  policy  produced  the  first  theory  of 
state  action  that  had  an  economic  basis — the  doctrine  of 

1  Supra,  Intr.  Part  ii.  for  the  effect  on  financial  theory. 


CHAP.  I.]  GENERAL   CONSIDERATIONS.  45 

laissez  faire  or  as  it  was  entitled  by  Adam  Smith  '  the 
simple  and  obvious  system  of  natural  liberty.'  Its  rise  at 
the  particular  time  was  the  result  of  powerful  forces.  It  is 
true  of  humanity  that  '  it  learns  truth  a  word  at  a  time '  so 
that,  as  the  problem  of  the  sixteenth  century  had  been 
religious  liberty,  that  of  the  seventeenth  political  liberty *, 
it  was  reserved  for  the  eighteenth  century  to  assert  the 
claims  of  industrial  and  commercial  liberty.  The  similarity 
in  general  features  of  these  movements  is  remarkable. 
Each  was  the  natural  reaction  against  exaggerated  pre- 
tensions ;  each  perhaps  attached  too  much  importance 
to  its  special  object,  but  all  have  profoundly  affected 
European  society  for  good.  In  examining  this  earliest 
scientific  theory  of  the  State  it  is  most  desirable  to  see 
exactly  what  its  doctrines  really  were.  The  common 
opinion  that  the  advocates  of  laissez  faire  were  opposed 
to  any  state  action  is  dissipated  by  a  study  of  their  writingS4 
They  lived  in  an  age  of  restrictions  in  which  the  most  pressing 
work  was  to  get  the  'many  hindrances  to  effectual  indus- 
trial activity  removedi  A  body  of  thinkers,  who  included 
Quesnay,  Turgot,  and  Du  Pont  de  Nemours  among  its  mem- 
bers, can  hardly  be  said  to  be  indifferent  to  the  needed 
functions  of  the  State.  The  real  bearing  of  the  laissez 
faire  or  *  natural  liberty '  system  can  be  best  appreciated 
by  a  consideration  of  the  exposition  given  of  it  by  Adam 
Smith.  In  a  well-known  passage  of  the  Wealth  of 
Nations  he  has  set  forth  the  functions  of  the  ideal  State 
in  a  manner  that  leaves  no  room  for  mistake  as  to  his 
views. 

*  According  to  the  system  of  natural  liberty,  the  sovereign 
has  only  three  duties  to  attend  to  j  three  duties  of  great 
importance  indeed,  but  plain  and  intelligible  to  common 
understandings  ;  first,  the  duty  of  protecting  the  society 
from  the  violence  and  invasion  of  other  independent  socie- 
ties ;  secondly,  the  duty  of  protecting  as  far  as  possible,  every 
member  of  the  society  from  the  injustice  or  oppression 

1  Strictly  true  only  of  England,  and  in  a  much  less  degree  of  France. 


46  PUBLIC   FINANCE.  [BOOK  I. 

of  every  other  member  of  it,  or  the  duty  of  establish- 
ing an  exact  administration  of  justice ;  and  thirdly,  the 
duty  of  erecting  and  maintaining  certain  public  works, 
and  certain  public  institutions,  which  it  can  never  be  for 
the  interest  of  any  individual,  or  small  number  of  indi- 
viduals, to  erect  and  maintain  ;  because  the  profit  could 
never  repay  the  expense  to  any  individual,  or  small  num- 
ber of  individuals,  though  it  may  frequently  do  much  more 
than  repay  it  to  a  great  society  V 

It  is  only  necessary  to  read  this  passage  in  order  to  see 
that  the  policy  favoured  by  Adam  Smith  was  not  a  purely 
negative  one.  The  State  has  not  merely  non-economic 
functions  ;  where  private  interest  is  likely  to  prove  insuffi- 
cient, it  has  economic  ones  also,  and  those,  too,  of  great 
extent  and  importance,  as  will  appear  when  considering 
his  more  detailed  discussion. 

The  predominance  in  the  domain  of  political  speculation 
of  the  laissez  faire  view  is  a  commonplace  of  the  historians 
of  political  economy2.  We  need  not  repeat  the  account 
already  given  of  the  different  effect  of  the  Smithian  doc- 
trine on  French  and  English  thought.  It  will  suffice  to 
see  the  operation  of  newer  tendencies,  and  for  this  purpose 
we  may  pass  at  once  to  J.  S.  Mill.  His  theory  of  state 
action  is  in  fact  a  product  or  rather  application  of  his 
utilitarianism,  and  thus  we  are  led  to  expect  what  we  do 
in  fact  find,  viz.  a  close  resemblance  between  his  practical 
proposals  and  those  of  Bentham  3.  He  declares  emphatically 
that— 

'  The  admitted  functions  of  government  embrace  a 
much  wider  field  than  can  easily  be  included  within  the 
ring  fence  of  any  restrictive  definition,  and  that  it  is 
hardly  possible  to  find  any  ground  of  justification  common 
to  them  all  except  the  comprehensive  one  of  general 
expediency  V 

1  286.  2  Ingram,  History  of  Pol.  Econ.,  ch.  5. 

3  See  specially  the  latter's  Theory  of  Legislation  ('  Principles  of  the  Civil 
Code ').  *  Principles,  Bk.  v.  ch.  I.  §  2. 


CHAP.  I.]  GENERAL   CONSIDERATIONS.  47 

This  extremely  vague  and  general  statement  is,  however, 
supplemented  by  a  declaration  in  favour  of  laissez  faire  as  a 
general  rule. 

'  Letting  alone,  in  short,  should  be  the  general  practice  : 
every  departure  from  it,  unless  required  by  some  great 
good,  is  a  certain  evil  V 

In  regard  to  state  action,  as  in  so  many  other  respects, 
Mill  occupied  a  transitional  position.  He  had  accepted  the 
traditional  creed  of  the  economists  which  was  strengthened 
by  his  own  sympathies  in  favour  of  freedom,  as  well  as 
by  his  study  of  the  brilliant  work  of  Dunoyer  2,  which  he 
frequently  quotes  with  approbation.  But  other  influences 
affected  him  ;  the  writings  of  the  French  socialists  and  the 
social  philosophy  of  Comte  both  tended  to  impress  him 
with  the  advantages  of  state  action  in  certain  comparatively 
untried  directions,  and  consequently  his  attitude  as  to  the 
true  policy  of  the  State  is  in  some  respects  not  defined  with 
sufficient  precision. 

Since  his  time  the  disposition  to  criticise  the  short- 
comings of  the  doctrines  of  the  Physiocrats  and  Adam 
Smith  has  become  general.  The  possible  theoretical 
difficulties  and  the  conflicts  of  individual  with  general 
interest  have  been  most  forcibly  stated  in  the  minute  and 
thorough  examination  of  Dr.  Sidgwick 3. '  This  natural 
tendency  has  been  reinforced  by  the  influence  of  German 
economists  who  repudiate  the  practical  position  of  Adam 
Smith  as  a  product  of  the  '  shallow  a  priori  rationalism '  of 
the  eighteenth  century,  which  regarded  the  State  as  an 
agent  for  determining  private  rights  and  duties  (Rechtsstaai) 
in  opposition  to  the  older  system  of  paternal  government 
(Polizeistaat).  This  newer  and  wider  conception  of  the 
State's  sphere  is  conveyed  in  the  term  s  civilizing  State ' 
(Culturstaai)  or  in  the  fuller  description  of  Bluntschli  who 
regards  'the  proper  and  direct  end  of  the  State  as  the 

1  Principles,  Bk.  v.  ch.  u.  §  7.  2  Libert e  du  Travail. 

8  Principles  of  Political  Economy,  Bk.  iii.  ch.  2.    See  also  his  Elements  of 
Politics,  ch.  10. 


\ 


48  PUBLIC   FINANCE.  [BOOK  I. 

development  of  the  national  capacities,  the  perfecting  of  the 
national  life,  and  finally  its  completion1.' 

Admitting  the  force  of  some  of  the  criticisms  that  have 
been  urged  against  an  exaggerated  policy  of  laissez  faire^  it 
seems  nevertheless  possible  to  adhere  to  the  substantial 
truth  of  the  doctrine  quoted  above  from  the  Wealth  of 
Nations.  The  real  ground  for  limitation  of  state  functions 
is  not  the  existence  of  an  abstract  rule  forbidding  various 
classes  of  acts.  The  rule  itself  is  dependent  on  the  results  of 
experience.  To  the  plea  that  in  many  cases  state  inter- 
vention would  obviate  evils  to  be  found  under  a  system  of 
liberty,  Adam  Smith  would  reply  that  the  legislator's 
'  deliberations  ought  to  be  governed  by  general  principles/ 
that  he  must  act  by  rules  which  in  the  supposed  cases 
would  do  more  harm  than  good,  and  that  it  is  the  balance 
of  advantage  which  needs  to  be  regarded. 

This  consideration  duly  weighed  suggests  the  possibility 
of  so  modifying  the  older  position  as  to  include  a  class  of 
cases  that  has  appeared  to  be  the  greatest  stumbling- 
block  in  its  way,  viz.  the  functions  of  the  State  in  the 
lower  stages  of  social  development.  Now  it  is  beyond 
question  plain  that  the  province,  and  therefore  the  ex- 
penditure, of  the  regulating  organs  of  society  will  vary  at 
different  stages  of  social  progress.  We  may  take  it  as  in- 
disputable that  the  duties  of  the  Sovereign  of  a  central 
African  State  and  of  the  government  of  a  European  society 
are  and  must  be  very  different,  but  the  conclusion  does  not 
follow  that  there  are  no  general  principles  to  which  the 
modes  of  state  action  may  conveniently  conform.  The 
construction  of  a  ( cut  and  dried '  formula  for  the  duties  of 
the  State  is  perhaps  an  impossible  task,  but  a  careful  study 
of  the  nature  and  forms  of  state  activity  as  determined  by 
the  character  of  its  organization  will  help  to  elucidate  the 
difficult  problem  of  its  suitable  duties. 

§  5.  For  understanding  the  true  position  of  the  State  it 

1  Theory  of  the  State  (Eng.  Trans.)  301.  C p.  also  Wagner,  i.  76;  Cohn, 
§§  34  sq, 


CHAP.  I.]  GENERAL   CONSIDERATIONS.  49 

is  essential  to  see  the  way  in  which  its  functions  have  been 
gradually  evolved.  In  the  rudest  forms  of  society  each 
individual  depends  on  his  own  resources.  The  Fuegians, 
e.g.  have  no  conception  of  government  and  consequently, 
as  Darwin  notes  1,  no  chance  of  attaining  to  civilization. 
Iff  the  hunting  tribe,  where  the  first  advance  beyond  the 
lowesr>%tage  of  savagery  has  been  made,  the  elder  is 
leader  in  war  and  judge  in  peace,  the  '  warriors  '  are  soldiers 
and  administrators.  The  tribe  hunts  in  common  over  its 
territory  which  it  tries  to  protect  from  intruders,  and  it 
divides  the  game  that  is  captured  among  its  members. 
Thus  we  see  that  war,  justice,  or  rather  the  administration 
of  custom,  and  economic  effort  are  the  three  forms  of  the 
rudimentary  society's  activity.  The  two  former,  and  especi- 
ally war,  are,  however,  the  kind  of  action  in  which  regulation 
is  needed  and  where  the  power  of  the  chief  is  particularly 
manifested. 

The  domestication  of  animals,  which  is  the  characteristic 
of  the  pastoral  stage,  facilitates  the  further  differentiation  of 
the  chief  and  ruling  body.  The  accumulation  of  the 
peculiar  wealth  of  the  period  is  more  an  individual  concern, 
but  war  and  justice  are  public  duties.  Here,  and  even  in 
the  preceding  stage,  we  can  notice  the  primitive  forms  of 
public  expenditure,  viz.  the  services  of  the  members  of  the 
clan,  and  commodities,  in  the  form  of  weapons  and  supplies 
for  those  going  on  expeditions. 

When  the  tribe  settles  down  on  the  land  and  devotes 
itself  to  agriculture  a  further  division  of  duties  appears. 
The  primitive  agricultural  community  frequently  tills  its 
land  by  means  of  slaves ;  the  freeman  confining  himself  to 
warlike  pursuits  and  the  duty  of  attendance  at  the  public 
assembly  where  he  has  to  decide  disputes  and  regulate 
matters  of  general  interest. 

Far  later  in  historical  order,  but  still  presenting  many 
points  of  resemblance  so  far  as  public  functions  are  con- 
cerned comes  the  '  feudal'  organization.  Some  of  the 

1   Voyage  of  the  '  Beagle,'  229,  230. 
t  E 


50  PUBLIC    FINANCE.  [BOOK  1. 

actuating  sentiments  are  different,  and  the  traditions  of  the 
Empire  and  the  Church  exercise  a  potent  effect  ;  but 
the  same  economic  basis  brings  about  a  reversion  to  the 
phenomena  of  earlier  periods.  The  '  feudal '  society  is 
essentially  militant.  State  power  is  vested  in  the  '  King ' 
or  '  Lord  '  who  represents  and  personifies  the  community. 
In  this  capacity  he  contracts  with  the  vassals  for  the  supply 
of  his  (i.  e.  the  State's)  needs.  The  feudal  army  with  its 
loose  organization  is  one  result  of  this  arrangement.  Justice 
is  administered  through  the  '  Lord's '  Courts.  The  economic 
side  of  state  activities  appears  in  the  management  of  the 
domain  and  the  regulation  of  commerce.  In  this  particular 
historical  form  we  notice  the  rudiments  of  much  that  is  im- 
portant in  the  developed  financial  systems  of  the  present  time. 
The  City  State  as  it  is  found  in  ancient  Greece  and  Italy, 
or  in  Germany  and  Italy  during  the  mediaeval  period, 
presents  a  distinctly  higher  type  of  political  life.  There 
is  no  longer  the  tribe  struggling  dimly  to  attain  to  the 
conception  of  political  unity.  The  disorganization  and 
absence  of  the  idea  of  political,  as  opposed  to  personal, 
duty  which  mark  the  '  feudal '  epoch  have  disappeared. 
The  free  citizen  of  Athens  or  Florence  had  as  firm  a 
(perhaps  a  firmer)  grasp  of  the  truth  that  he  owed  duties 
to  his  city  as  the  Englishman  of  to-day.  An  exaggerated 
conception  of  the  State's  powers,  and  a  disregard  of  private 
rights  were  a  natural  consequence,  but  so  far  as  the  financial 
aspect  of  political  life  is  concerned,  we  may  note  the  close 
analogy  in  many  respects  to  the  modern  State.  More 
especially  is  this  true  of  the  objects  of  public  outlay.  The 
maintenance  of  military  (and  in  some  cases  of  naval)  force, 
the  administration  of  justice  and  police,  the  furtherance  of 
certain  economic  ends  are  the  principal  claims  on  the 
public  resources.  Subordinate  to  these  main  parts  of 
public  service  may  be  enumerated  certain  requirements, 
also  represented  in  modern  budgets,  to  wit,  provision  for 
religious  service,  for  education  and  for  matters  affecting 
social  well-being. 


CHAP.  I.]  GENERAL   CONSIDERATIONS.  5! 

The  later  developments  of  state  life,  either  in  the  Roman 
Empire  or  in  modern  European  countries,  present  the  same 
general  groups  of  public  wants.  Many  special  points  will 
require  attention  when  we  come  to  examine  more  closely 
the  detailed  heads  of  expenditure,  but  so  far  as  the  general 
outline  goes  there  is  in  many  respects  a  consensus  of 
practice  in  all  stages  of  society  respecting  the  sphere  of  the 
State  '. 

§  6.  The  preceding  survey  of  the  actual  development  of 
state  functions  brief  and  imperfect  as  it  is  tends  to  confirm 
and  yet  in  some  degree  to  qualify  the  conclusions  of  theory. 
The  forms  of  state  outlay  have  arisen  gradually  in  the 
course  of  history  as  the  outcome  of  social  conditions  and 
sentiments,  and  they  in  turn  influence  the  society.  A  com- 
munity in  which  some  special  duty  has  been  for  a  long 
period  entrusted  to  the  public  power  will  not  easily  be  able 
to  dispense  with  this  mode  of  supplying  its  need.  The 
force  of  habit  is  as  great  here  as  in  other  cases.  The  con- 
ditions of  social  life  are,  however,  subject  to  incessant 
change.  The  state  outlay  suited  for  the  Middle  Ages 
when  war  and  religion  were  the  great  operating  forces  is 
almost  necessarily  unfit  for  the  modern  age  concerned  as 
well  with  industry  and  commerce.  The  ready  acceptance 
of  this  truth  must  not  lead  us  to  ignore  the  equally  im- 
portant fact,  that  state  wants  in  their  main  features  are 
permanent  to  a  surprising  degree.  It  is  not  in  the  character 
of  the  public  needs  but  in  the  modes  of  supplying  them  that 
the  most  remarkable  changes  occur.  There  is,  moreover,  a 
universal  recognition  of  the  superior  claims  of  defence  and 
justice  as  being  the  primary  duties  of  the  State. 

Writers  of  all  schools  agree  in  this  belief,  and  so  far 
history  and  analysis  are  in  accord.  The  disputable  part 
of  state  outlay  is  that  which  more  especially  concerns  eco- 
nomic and  social  administration,  and  even  here  a  good 
deal  of  the  matter  of  controversy  lies  outside  the  subject 

1  Cp.  Cohn,  Book  i.  chaps.  I,  2,  for  a  general  view  of  the  financial  relations 
of  social  development.  Also  Vocke,  Abgaben,  &c.,  Part  i. 

E  a 


52  PUBLIC    FINANCE.  [BOOK  T. 

of  pure  Finance  and  belongs  more  fitly  to  economic 
policy.  Some  trifling  amount  may  be  expended,  say,  on 
the  promotion  of  art.  The  advocate  of  laissez  faire  may 
object  to  the  course  as  a  matter  of  economic  policy,  but  so 
far  as  Finance  is  concerned  the  smallness  of  the  amount 
makes  it  a  matter  of  comparative  indifference.  The  ques- 
tion of  public  expenditure  in  its  fiscal  aspects  is  best 
considered  in  relation  to  each  particular  period  of  society. 
We  may  even  accept  the  doctrine  of  Mill,  that  '  In  the 
particular  circumstances  of  a  given  age  or  nation,  there  is 
scarcely  anything,  really  important  to  the  general  interest, 
which  it  may  not  be  desirable,  or  even  necessary,  that  the 
government  should  take  upon  itself1,'  while  we  at  the  same 
time  remember  that  Adam  Smith's  determination  of  the 
Sovereign's  duties  can  include  these  possible  cases.  Finan- 
cial theory  in  its  application  to  the  modern  State  is  at  all 
events  bound  to  recognise  and  indicate  clearly  the  diffi- 
culties which  extension  of  state  action  is  likely  to  produce. 
The  growing  budgets  of  all  modern  societies  have  the 
tendency  towards  enlarging  the  sphere  of  the  State  as  their 
ultimate  cause,  and  it  is  important  to  see  that  a  persistence 
in  this  policy  is  certain  to  lead  to  embarrassments  in  financial 
administration,  but  the  very  necessity  for  discussing  this 
subject  compels  us  to  examine  the  forms  of  expenditure  as 
they  have  been,  and  are,  while  seeking  to  indicate  what 
they  ought  to  be. 

§  7.  Another  aspect  of  State  wants  requires  notice.  All 
economic  life  depends  on  a  due  supply  of  two  distinct 
classes  of  objects,  viz.  commodities  and  services,  or,  in  less 
technical  language,  material  objects  and  human  labour. 
The  public  power  cannot  dispense  with  either  of  these 
forms  of  supply,  and  at  each  period  of  its  existence  we 
find  it  demanding  them  both.  The  hunting  tribe  requires 
its  warriors  and  their  weapons  and  food  :  either  the  men 
without  equipment,  or  the  outfit  without  the  men,  would 
be  useless.  This  distinction  runs  through  every  phase  of 

1  Principles,  Bk.  v.  ch.  n,  §  16. 


CHAP.  T.]  GENERAL   CONSIDERATIONS.  53 

social  evolution,  though  it  is  much  more  complex  in  the 
higher  stages.  A  very  rude  community  can  summon  its 
members  to  act  for  the  public  good,  and  require  them  to 
fit  themselves  for  their  task.  In  such  cases  outlay  and 
income  are  combined  ;  the  member  of  the  tribe  is  at  once 
paying  his  taxes  and  performing  a  public  service.  The 
opposite  extreme  is  witnessed  in  a  civilized  State  of  the 
present  age.  The  supply  of  public  wants  is  obtained  by 
the  purchase  of  commodities  and  the  hire  of  services  ;  the 
power  to  carry  out  these  transactions  being  procured 
through  the  possession  of  the  public  revenue.  Intermediate 
stages  show  us  the  way  in  which  personal  service  was 
commuted  for  money  payment,  and  the  delivery  of  com- 
modities in  kind  was  obviated  by  the  development  of  a 
money  economy.  Survivals  of  the  older  order  continue  ;  in 
some  cases  they  are  too  important  to  be  regarded  as  mere 
relics  of  the  past :  they  are  rather  '  revivals '  under  new 
and  favouring  conditions.  When  dealing  with  revenue  we 
shall  have  to  compare  the  direct  with  the  circuitous  method 
of  satisfying  public  needs,  and  in  the  present  Book  we  shall 
have  to  note  some  of  the  economic  consequences  of  the 
adoption  of  one  or  other  of  these  modes. 

Having  disposed  of  the  more  general  aspects  of  public 
expenditure,  we  shall  next  consider  the  several  details,  com- 
mencing with  the  oldest  and  most  enduring — the  need  for 
defence  against  outside  enemies. 


CHAPTER    II. 

THE  COST  OF  DEFENCE. 

• 

§  1.  ADAM  SMITH  commences  his  examination  of  the 
cost  of  defence  by  the  statement  that  it  '  is  very  different 
in  the  different  states  of  society/  and  adds,  as  the  result  of 
his  inquiry,  that  it  '  grows  gradually  more  and  more  ex- 
pensive as  the  society  advances  in  civilization  V  A  refer- 
ence to  the  statistics  of  military  and  naval  expenditure  will 
show  that  the  tendency  to  increased  outlay  has  continued 
during  the  century  that  has  elapsed  since  the  above  passage 
was  written2.  There  is,  moreover,  no  sign  of  change  in 
this  respect.  It  is  as  certain  as  any  prediction  in  social 
matters  can  be,  that  no  reduction  in  the  military  budgets 
of  Europe  will  soon  be  made ;  on  the  contrary,  there  is 
every  probability  that  this  form  of  expenditure  will  go  on 
increasing  in  the  future  as  it  has  done  in  the  past. 

The  causes  that  have  produced  this,  at  first  sight,  un- 
fortunate state  of  things,  must,  it  is  clear,  be  deep-seated 
and  persistent,  and  accordingly,  when  we  scrutinise  more 
closely  the  operating  forces,  it  appears  that  the  increased 
cost  of  warfare  and  of  the  preparations  which  it  involves  is 
closely  connected  with  some  of  the  normal  features  of  social 
development.  It  is  principally  the  result  of  two  general 
tendencies,  viz.  (i)  the  increased  division  of  labour  which 
necessarily  accompanies  the  advance  of  society,  and  (2)  the 

1  289,  cp.  296.  2  See  tables  at  end  of  this  chapter. 


CHAP.  II.]  THE   COST   OF   DEFENCE.  55 

development  of  those  inventions  that  are  such  a  striking 
characteristic  of  modern  civilization.  The  former  makes 
it  absolutely  essential  to  set  a  specially  trained  section  of 
the  population  apart  for  military  service  to  the  sacrifice  of 
their  assistance  in  the  ordinary  work  of  production,  while 
they  usually  receive  a  higher  reward  than  a  similar  body  of 
labourers  would  be  able  to  command  in  the  market.  The 
pay  of  the  British  army  is  a  good  illustration  of  this  fact, 
and  it  is  the  most  suitable  instance  to  take,  as  enlistment 
in  it  is  purely  voluntary.  The  rapid  progress  of  scientific 
discovery  increases  the  cost  of  warlike  material  and  equip- 
ment, since  the  constituents  of  this  part  of  *  consumers'' 
capital,'  as  it  may  be  called,  become  much  more  elaborate 
and  have  to  be  more  frequently  replaced.  If  we  compare 
the  stock  of  weapons  of  a  savage  tribe  with  the  equipment 
of  a  mediaeval  army,  and  either  of  them  with  the  war 
material  now  necessary  for  a  single  '  army  corps '  of  any 
European  State,  we  cannot  fail  to  recognise  the  increase  in 
complexity  and  in  cost  which  the  later  organizations  show. 
Even  in  the  last  quarter  of  a  century  the  changes  in  war- 
like implements  and  supplies  have  been  such  as,  while 
vastly  increasing  their  cost,  to  render  them  very  different 
from  the  appliances  previously  existing. 

§  2.  The  expenses  of  defence  and  agression  have,  it  must 
be  noticed,  to  be  divided  into  two  distinct  parts.  The 
former,  which  may  be  regarded  as  the  normal  and  regular 
part — the  peace  establishment — meets  the  preparation  for 
war.  It  is  so  well-recognised  a  feature  of  the  modern 
budget,  that  it  passes  without  comment.  The  other  part 
of  state  outlay  in  this  respect  is  that  devoted  to  actual 
warfare ;  it  is  evidently  irregular  in  amount  and  may  so  far 
be  called  'abnormal,'  though  it  is  almost  certain  to  recur 
at  indefinite  intervals l. 

The  cost  of  preparation  for  war  consists  in  obtaining  a 
supply  both  of  services  and  commodities,  i.e.  in  the  re- 
cruiting and  training  of  troops,  the  provision  for  pensions, 

1  See  infra,  Bk.  i.  ch.  8.  §  I.     Cp.  Wagner,  i.  417  sq.     Roscher,  §  119. 


56  PUBLIC    FINANCE.  [BOOK  I. 

and  the  selection  and  preparation  of  arms,  ammunition,  and 
stores  generally.  Actual  war  causes  expenditure  on  cam- 
paigns and  expeditions,  and,  further,  in  the  replacement  of 
losses  alike  in  men  and  stores,  incurred  during  its  con- 
tinuance. In  estimating  the  loss  to  society  through  the 
persistence  of  the  custom  of  war  between  nations,  both  the 
above-mentioned  elements  have  to  be  combined  in  order  to 
judge  accurately  of  the  real  cost  imposed. 

§  3.  Preparation  for  war,  as  it  appears  in  the  successive 
stages  of  society,  conforms  to  the  general  principle  de- 
clared by  Adam  Smith.  In  a  savage  or  barbarous  com- 
munity the  cost  of  warlike  preparation  is  insignificant.  The 
ordinary  course  of  life  is  of  itself  a  training  for  times  of 
conflict;  the  hunter  or  shepherd  is  ready  at  the  shortest 
notice  to  transfer  his  exertions  to  a  fresh  and  more  exciting 
employment.  Such  rude  societies  are  (with  some  rare 
exceptions)  organized  on  a  basis  of  militancy,  all  the  adult 
males  being  available  as  'warriors.'  Similar  conditions 
prevail  with  respect  to  commodities.  Bows,  spears,  staves, 
&c.,  are  useful  either  in  peace  or  war  ;  they  are  eminently 
non-specialized  capital,  and  more  elaborate  contrivances 
are  as  yet  unthought  of.  The  introduction  of  agriculture 
has  a  modifying  effect,  in  so  far  as  it  tends  to  retard  the 
mobility  of  labour  and  commodities,  but  even  in  this  stage 
the  same  general  features  recur.  The  ordinary  husband- 
man easily  becomes  a  soldier,  and  there  is  a  recognised 
interchange  between  swords  and  plough-shares.  An  in- 
vasion is  still  carried  out  or  opposed  by  a  levee  en  masse, 
and  usually  takes  place  in  the  *  off-season  '  of  agricultural 
work.  The  cost  of  preparation  for  such  wars  obviously 
cannot  be  very  heavy. 

The  introduction  of  manufactures,  and  the  establishment 
of  urban  life  that  accompanies  it,  puts  an  effectual  check 
to  the  ruder  forms  of  belligerency.  A  State  possessing  the 
varied  elements  of  an  industrial  society — even  in  a  rudi- 
mentary form — cannot  permit  the  suspension  of  the  normal 
economic  processes  during  a  period  of  hostilities,  and  it  is 


CHAP.  II.]  THE   COST   OF   DEFENCE.  57 

therefore  compelled  to  make  adequate  arrangements  in 
time  of  peace  in  order  to  obviate  the  danger.  The  diffi- 
culty is  met  by  the  introduction  of  standing  armies  whose 
origin  is  thus  easily  explained.  It,  in  fact,  becomes  neces- 
sary to  carry  the  gradually  increasing  division  of  employ- 
ments into  the  military  art,  and  to  form  at  least  the  nucleus 
of  an  army  which  can  be  readily  increased  in  case  of 
need.  The  difficulty  of  suddenly  shifting  the  artisan  from 
the  workshop  to  the  field  of  battle  makes  this  imperative. 
Improvements  in  weapons  and  systems  of  discipline  furnish 
additional  reasons  in  favour  of  increased  special  training, 
to  be  given  either  to  the  whole  efficient  population,  or  to 
a  selected  portion  of  it,  but  in  any  case  involving  larger 
outlay. 

The  section  of  the  Wealth  of  Nations  devoted  to  this 
topic  regards  the  adoption  of  either  of  the  alternatives  just 
mentioned  as  a  cardinal  point  in  the  evolution  of  the 
military  system.  The  former  method  —  that  of  training 
the  whole  effective  population — is  described  as  the  creation 
of  a  militia,  the  latter  as  the  formation  of  a  standing  army, 
and  a  very  strong  judgment  is  pronounced  in  favour  of  the 
latter  expedient.  Admitting  fully  the  truth  of  some  of 
the  views  set  forth  on  this  point  by  Adam  Smith  it  is 
nevertheless  desirable  to  remember  that  they  by  no  means 
exhaust  the  subject  and  the  considerations  relevant  to  it. 
His  appeal  to  history  more  particularly  strikes  the  reader 
as  superficial.  To  support  his  contention  that  standing 
armies  are  always  superior  to  militias — an  idea  evidently 
derived  from  his  belief  in  the  advantages  of  increased 
division  of  labour 1 — he  brings  forward  the  examples  of 
the  Macedonian  army  that  overthrew  the  forces  of  the 
Hellenic  commonwealths  and  the  Persian  Empire;  the 
early  successes  of  Hannibal  and  the  ultimate  triumph  of 
the  Romans,  and  finally  the  fall  of  the  Western  Empire 
before  the  barbarian  invaders.  The  cases  quoted,  however, 

1  In  some  cases  Adam  Smith  saw  clearly  enough  that  division  of  labour  was 
not  always  desirable.  Cp.  217  and  327. 


58  PUBLIC   FINANCE.  [BOOK' I. 

fail  to  establish  the  doctrine  asserted.  It  is  surely  contrary 
to  fact  to  speak  of  the  army  of  imperial  Rome  as  '  a 
militia  ' ;  if  ever  there  were  a  '  standing  army  '  it  was  one. 
The  whole  discussion  in  short  amounts  simply  to  this  : 
that  the  better  disciplined  and  trained  force  will  generally 
defeat  its  opponent,  and  that  it  ought  to  be  called  '  a 
standing  army.'  The  historical  summary  is  accurate  if 
somewhat  trite,  but  the  interpretation  results  in  a  truism. 

We  have  therefore  to  replace  Adam  Smith's  account  by 
one  more  consonant  with  facts  while  preserving  those  parts 
of  his  exposition  that  are  substantially  correct.  It  is 
certainly  beyond  dispute  that  the  course  of  development 
tends  to  replace  the  rude  levies  described  as  *  militias '  by 
the  better-trained  forces  known  as  '  standing  armies.'  In 
addition  to  the  instances  given  above,  we  may  mention  the 
introduction  of  permanent  armies  in  every  European  State, 
so  that  the  general  tendency  towards  specialization  is 
clearly  operative  in  this  as  in  other  cases.  An  opposing 
tendency,  however,  comes  into  play.  It  is  equally  a  prin- 
ciple of  evolution  that  all  organized  bodies  tend  to  lose 
their  original  plasticity;  they  become,  as  it  were,  crystallized 
into  a  rigid  form,  and  from  this  condition  armies  are  not 
exempted.  But  warfare  is  the  struggle,  for  existence  in 
its  intensest  shape,  and  in  that  struggle,  mobility  and 
power  of  adjustment  are  important  advantages.  The  natural 
result  is  that  the  most  efficient  military  machine  or  orga- 
nization of  one  period  proves  to  be  unsuitable  for  the 
changed  requirements  of  another  and  later  one.  The 
history  of  war  is,  in  fact,  a  series  of  illustrations  of  this 
truth.  As  convincing  and  well-known  examples  we  need 
only  note  the  Phalanx,  the  Legion,  the  man-at-arms  of 
mediaeval  times,  the  army  system  of  Frederick  the  Great, 
and  the  French  system  of  the  present  century.  And  it 
may  well  happen  that  a  future  European  war  will  afford  a 
further  instance  in  the  fate  of  the  present  German  army. 
The  essential  condition  of  military  efficiency  is  constant 
readjustment — incessant  striving  towards  improvement  in 


CHAP.  II.]  THE   COST   OF   DEFENCE.  59 

discipline,  training,  and  equipment.  Such  efforts,  necessary 
as  they  are,  demand  continuous  intellectual  strain  on  the 
part  of  the  organizers,  and  heavy  demands  on  the  public 
purse. 

§  4.  If,  as  we  believe,  Adam  Smith  failed  to  correctly 
interpret  the  past,  he  certainly  did  not  succeed  in  fore- 
casting the  future.  Up  to  his  time  there  had  been  a  steady 
movement  towards  the  establishment  and  increase  of  per- 
manent forces  maintained  at  great  cost.  The  effect  pro- 
duced on  thoughtful  persons  by  the  growing  European 
armaments  can  be  best  understood  by  considering  the  views 
of  Montesquieu.  In  a  remarkable  chapter  of  the  Spirit 
of  Laws1  he  describes  the  position  and  its  dangers  to  the 
future  of  Europe  in  the  following  terms  : — 

'  A  new  disease  has  spread  through  Europe ;  it  has 
seized  on  our  sovereigns  and  makes  them  maintain  an 
inordinate  number  of  troops.  It  is  intensified  and  of  neces- 
sity becomes  infectious,  for  as  soon  as  one  State  increases 
its  forces  the  others  at  once  increase  theirs,  so  that  nothing 
is  gained  by  it  except  general  ruin.  Each  monarch  keeps 
on  foot  as  many  armies  as  if  his  people  were  in  danger  of 
extermination ;  and  this  struggle  of  all  against  all  is  called 
peace !  Thus  is  Europe  ruined  to  such  a  degree  that 
private  persons  in  the  present  position  of  the  three  richest 
powers  of  that  quarter  of  the  globe  would  not  have  the 
means  of  living.  We  are  poor  with  the  wealth  and  com- 
merce of  the  whole  world  ;  and  soon  by  dint  of  having 
soldiers  we  shall  have  nothing  but  soldiers  and  be  like 
the  Tartars.  For  that  we  need  only  make  effective  the 
new  invention  of  militias  established  in  most  of  Europe 
and  carry  it  to  the  same  excess  as  we  have  the  regular 
troops.' 

This  vigorous  statement  has  been  largely  justified  by 
the  actual  course  of  events.  The  wars  that  resulted  from 
the  French  Revolution  proved  the  power  of  national  senti- 
ment to  raise  and  maintain  enormous  forces  during  a 

J   ttk.  xiii.  ch.  17. 


60  PUBLIC   FINANCE.  [BOOK  I. 

period  of  protracted  conflict,  and  the  reform  of  the  Prussian 
army  under  Hardenberg's  guidance  after  the  disaster  at 
Jena,  carried  the  tendency  towards  the  enrolment  of  the 
nation  into  periods  of  peace.  The  wars  of  the  third 
quarter  of  the  present  century,  and  especially  the  Austro- 
Prussian  war  of  1866,  and  the  Franco-German  one  of  1870-1, 
have  greatly  increased  the  popularity  of  the  national  army 
system  which  has  been  adopted  by  nearly  all  continental 
States l,  and  has  been  approved  by  many  English  writers. 
The  change  of  opinion  in  recent  years  is  perhaps  most 
instructively  shown  in  a  remarkable  essay  of  Cairnes,  where 
the  respective  merits  of  the  older  French,  the  English,  and 
Prussian  systems  are  estimated  with  a  conclusion  strongly 
in  favour  of  the  '  national  army  V 

We  almost  seem  to  have  lost  sight,  for  the  moment,  of 
economic  and  financial  considerations,  but  they  really  un- 
derlie the  whole  military  movement  of  modern  times.  The 
increase  of  permanent  forces  had  reached  its  limit  before 
the  opening  of  the  French  Revolution  when  about  one  per 
cent,  of  the  population  was  available  for  actual  service. 
The  prolonged  conflicts  which  arose  out  of  that  event  led 
to  the  addition  (as  Montesquieu  apprehended)  of  a  militia. 
The  modern  national  army  in  its  full  force  is  the  old 
'  standing  army,'  plus  a  levee  en  masse,  the  latter,  it  is  true, 
being  suitably  organized  and  equipped.  This  system, 
though  produced  at  first  by  a  particular  set  of  circum- 
stances, was  obviously  necessitated  by  economic  conditions. 
Military  power  had  to  be  increased,  and  as  the  state 
revenues  did  not  allow  of  increase  in  the  permanent  force, 
the  only  alternative  was  that  actually  adopted,  by  which 
the  whole  effective  male  population  became  a  reserve,  and 
was  yet  enabled,  in  times  of  peace,  to  carry  on  its  ordinary^ 
industrial  pursuits. 

1  See  Wagner,  i.  427,  for  a  full  list. 

2  Cairnes,  Political  Essays,  199-255.     On  this  point  his  judgment  is  for  once 
supported  by  the  agreement  of  Cliffe  Leslie,  Essays  (ist  ed.),  128-147.  Leslie's 
opinion  is  the  more  valuable,  as  it  was  formed  after  personal  study  of  the 
Prussian  system,  and  was  in  opposition  to  his  earlier  belief. 


CHAP.  II.]  THE   COST   OF   DEFENCE.  6l 

The  question  of  cost  is  in  the  last  resort  decisive,  and  it 
is  by  it  that  the  merits  of  the  several  military  systems  must 
be  judged.  One  of  the  conditions  to  be  included  in  our 
measurement  of  cost  is  efficiency.  National  defence  is  too 
important  even  from  a  purely  economic  standpoint  to  be 
placed  in  jeopardy  through  narrow  ideas  of  economy.  An 
ineffective  and  badly  organized  army  is  dear  on  any  terms, 
though  on  the  other  hand  large  outlay  will  not  of  itself 
secure  efficiency,  and  so  far  weakens  the  economic  resources 
of  the  nation.  The  problem  is,  indeed,  as  remarked 
before  *,  one  of  extreme  difficulty,  and  only  allows  of  an 
approximate  solution.  As  regards  the  cost  or  sacrifice  in- 
volved in  the  various  methods  of  defence,  the  national  army 
presents  two  great  advantages:  (i)  it  requires  less  direct 
outlay,  and  (2)  its  real  pressure  is  not  so  acutely  felt.  It 
is  plain  that  services  obtained  through  legal  compulsion 
will  be  cheaper  than  those  that  are  hired  in  the  labour 
market  at  the  current  rate.  Moreover,  when  the  duty  of 
military  service  is  general  and  enforced  without  favouritism 
the  sacrifice  entailed  by  it  will  probably  be  less  felt  than 
if  the  large  amount  of  additional  funds  needed  under  volun- 
tary enlistment  had  to  be  levied  through  taxation.  Grant- 
ing, however,  both  these  positions,  it  yet  remains  doubtful 
whether  the  indirect  losses  may  not  be  more  than  the  gains 
just  mentioned.  The  real  cost  of  an  army  formed  on  the 
German  type  is  hard  to  measure.  Mere  comparison  of 
army  estimates  will  not  establish  its  superiority  over  a 
freely-enrolled  force.  Thus  an  able  writer 2  compares  the 
English  and  German  outlay  for  1883-4.  The  former  was 
£16,600,000  for  199,273  men,  the  latter  £18,325,000  for 
445,392  men,  i.  e.  an  army  much  more  than  twice  that  of 
England  was  maintained  by  Germany  at  an  increased  cost 
of  only  10  per  cent.  This  estimate  is  supported  by  addi- 
tional calculations,  which  make  the  cost  per  soldier  in 
England  £86,  in  Germany  only  £44,  or  little  over  half. 
Such  calculations  err  in  the  omission  of  several  material 

1  Supra,  ch.  i.  §  2.  2  Geffcken  in  Schonberg,  53. 


62  PUBLIC   FINANCE.  [BOOK  I. 

circumstances.  The  rates  of  wages  and  salaries  in  the  two 
countries  are  not  on  the  same  level.  Under  any  system  a 
given  number  of  German  soldiers  would  cost  less  than  an 
equal  number  of  English  ones.  Next,  though  the  com- 
pulsory service  in  the  former  country  reduces  considerably 
the  amount  of  direct  outlay  by  the  State,  it  inflicts  a  tax 
on  those  compelled  to  serve,  whose  amount  could  be 
measured  only  by  what  they  would  pay  in  order  to  escape 
it.  A  third  influencing  condition  is  the  indirect  effect  on 
the  productive  powers  of  the  country. 

'The  military  service/  says  a  favourable  critic  of  the 
German  army,  *  postpones  to  a  relatively  very  late  period 
the  productive  use  of  the  productive  power  of  the  country. 
.  .  .  The  waste  of  skilled  labour  ...  is  enormous.  The 
future  artisan  or  mechanic  has  not  learned  his  business 
when  he  enters  the  army,  nor  can  he  practise  it  until  he 
leaves  the  regiment.  .  .  .  Half  the  lifetime  of  the  flower  of 
the  population  is  thus  unproductively  spent.  Even  in  the 
case  of  unskilled  labourers  or  peasants,  who  can  go  to  work 
from  the  day  they  leave  barracks,  a  considerable  loss  is 
sustained  V 

None  of  the  foregoing  considerations  are  taken  into 
account  by  Geffcken.  It  may,  indeed,  be  argued  that  the 
habits  of  discipline  and  order  acquired  during  service  should 
be  placed  to  the  credit  of  the  German  system,  but  this 
questionable  item  would  not  much  affect  the  general 
result,  more  especially  when  we  add  the  probable  loss  of 
originality  and  initiative,  which  is  another  result  of  dis- 
cipline. The  national  army  system  further  involves  a 
supervision  of  the  movements  of  all  the  members  of  the 
potential  war  force,  and  such  regulation  must  in  some 
degree  restrict  the  free  flow  of  labour  to  suitable  markets. 

The  difficulties  in  the  way  of  any  estimate  of  the  financial 
merits  of  different  army  systems,  already  evident  enough, 
are  enhanced  by  the  special  circumstances  with  which  each 

1  Leslie,  Essays  (ist  ed.),  143.  See  Wagner,  i.  426,  for  a  directly  opposite 
view. 


CHAP.  II.]  THE   COST   OF   DEFENCE.  63 

country  has  to  deal,  and  which  render  the  complete  adoption 
of  a  foreign  system  almost  impossible.  Thus' England  has 
to  provide  garrisons  for  many  places  very  distant  from  her 
own  territory,  and  service  of  this  kind  in  India  or  the  Crown 
Colonies  could  not  be  made  compulsory.  Separation  of 
the  home  and  foreign  (or  Indian  and  Colonial)  armies 
appears  a  retrograde  step  *,  and  in  any  case  the  supposed 
home  force  might,  in  time  of  pressure,  be  required  for 
service  abroad.  A  great  power,  whose  foreign  possessions 
are  insignificant,  has  not  this  problem  to  face. 

§  5.  A  partial  solution  of  the  difficulty  of  procuring 
sufficient  military  force  without  compulsory  service,  and  at 
the  same  time  keeping  expenditure  within  due  bounds  is 
presented  in  the  English  Volunteer  system.  By  this 
method  the  public  spirit  of  the  citizens  leads  them  to  give 
a  portion  of  their  time  to  acquiring  the  rudiments  of  mili- 
tary training  and  sufficient  dexterity  in  the  use  of  weapons. 
Competent  military  opinion  seems,  however,  to  hold  that  a 
considerable  degree  of  organization  is  necessary  in  order  to 
make  volunteer  forces  of  any  real  service  in  time  of  war. 
The  endeavour  to  combine  the  strict  discipline  essential  for 
the  soldier  with  the  freedom  naturally  claimed  by  the 
volunteer  is  not  an  easy  one,  though  the  object  is  eminently 
desirable.  Besides  its  great  advantage  in  fostering  the 
national  sentiment  of  the  members,  and  impressing  them 
with  the  conception  of  their  duties  to  the  State,  the  volun- 
teer corps  would,  by  taking  charge  of  the  home  fortresses, 
probably  allow  the  regular  troops  to  be  drawn  off  for  foreign 
service,  and  would  also  be  a  valuable  source  for  re- 
cruiting. 

It  may  further  be  remarked  that  a  very  general  enrolment 
of  the  active  population  in  such  bodies,  under  proper  disci- 
pline, would  be  equivalent  to  the  national  army  system,  and 
at  the  same  time  avoid  the  evil  of  compulsion.  In  this 
as  in  other  cases  of  volunteer  assistance  for  public  service, 

1  This  plan  has  recently  been  advocated  by  Sir  C.  Dilke,  Problems  of  Greater 
Britain,  380. 


64  PUBLIC    FINANCE.  [BOOK  I. 

the  chief  difficulty  is  to  enable  the  two  agencies  to  fit  in  to 
each  other  without  friction  or  waste. 

§  6.  The  navies  of  the  various  powers  do  not  present  as 
much  difficulty,  for  they  are  far  less  costly  so  far  as  the 
supply  of  their  personal  service  is  concerned,  and  that 
supply  is  taken  from  a  special  class  already  trained  to  a 
life  of  hardship,  and  accustomed  to  constant  supervision 
and  control,  though  here,  too,  the  question  of  obtaining  the 
necessary  force  without  undue  outlay  is  a  serious  one. 

§  7.  The  best  and  most  economical  mode  of  supplying 
equipment  and  material  for  both  military  and  naval  forces 
has  been  for  some  time  recognised  as  a  grave  problem. 
The  extraordinary  rapidity  of  inventions  soon  makes  the 
most  costly  and  best-devised  appliances  antiquated.  It 
seems  a  hopeless  task  to  provide  all  new  agencies  of  attack 
and  defence,  owing  to  their  great  expense  and  their  certain 
replacement  by  later  improvements,  so  that  it  might  appear 
that  the  wisest  course  was  to  await  the  outbreak  of  war, 
and  then  procure  the  best  existing  weapons.  Unfortunately 
such  a  course  is  not  practicable.  Ships  and  ordnance  can- 
not be  speedily  produced  and  distributed.  The  stock,  the 
'  fixed  capital '  of  destruction  as  it  may  be  called,  like  that 
of  productive  industry,  takes  time  to  create,  and  in  warfare 
delay  is  fatal.  A  steadily  progressive  course  seems  the 
most  advisable  in  this  respect,  even  from  the  purely  financial 
point  of  view,  as  the  pressure  is  more  evenly  distributed, 
and  by  adopting  this  policy  there  is,  on  the  whole,  the  best 
chance  of  security. 

Against  the  undoubted  evil  of  the  great  increase  of  outlay 
on  armaments,  it  is  satisfactory  to  be  able  to  point  to  some 
compensation,  or  at  least  alleviation.  One  result  is  to 
favour  the  wealthier,  and  therefore  the  most  industrious 
nations.  A  rich  State  can  obtain  the  best  ships,  rifles  and 
cannon,  and  so  gains  the  same  advantage  over  its  poorer 
rivals  that  civilized  peoples  generally  gained  over  bar- 
barians by  the  invention  of  firearms.  Then,  as  Mr.  Giffen 
and  Cohn  have  suggested,  the  increased  cost  of  warlike 


CHAP.  II.]  THE   COST  OF   DEFENCE.  65 

equipment  is  accompanied  by  an  immense  expansion  of 
industrial  production  ;  if  the  burden  be  heavier  the  bearer  is 
stronger,  and  is  not  so  much  oppressed  as  we  might  at  first 
suppose  ;  and  finally,  though  this  is  problematical,  the  skill 
developed  in  aiding  the  work  of  destruction  is  also  of  ser- 
vice for  industry1.  The  best  method  of  procuring  arms 
and  supplies  is  also  a  doubtful  matter.  The  usual  alterna- 
tives are :  purchase  in  the  open  market,  or  state  manu- 
facture, and  in  the  former  case  the  contracts  may  be  given 
privately  or  by  public  tender ;  but  the  advisability  of  state 
manufacture  may  be  reserved  for  a  more  suitable  place  2. 

§  8.  The  cost  of  actual  war  presents  problems  very  similar 
to  those  already  considered.  The  national  army,  when  in  the 
field,  is  a  very  expensive  agency.  f  An  army  composed  of 
such  materials  as  the  Prussian,  cannot  be  employed  in  war 
without  immense  loss  and  suffering  both  to  the  soldiers  and 
the  whole  nation  3.'  The  ordinary  standing  army,  on  the 
other  hand,  is  often  unfavourably  criticised  as  being  com- 
posed of  the  refuse  of  the  population  4.  Were  this  true  it 
would  be  rather  an  advantage  in  the  event  of  war,  except 
in  so  far  as  it  detracted  from  military  efficiency.  In  any 
case  it  is  difficult  to  measure  the  cost  incurred  in  War 
apart  from  the  direct  outlay  and  the  loss  of  men  and 
material  in  the  conflict.  There  is,  besides,  the  disturbance  in 
the  economic  system  which  is  a  necessary  result,  and  which 
may  injuriously  affect,  not  merely  the  national  well-being, 
but  the  state  revenues.  Such  consequences  are  hard  to 
foresee,  and  vary  widely  in  different  nations.  With  regard 
to  England,  for  example,  the  outbreak  of  war  would 
materially  injure  her  shipping  trade,  which  forms  so  im- 
portant a  part  of  her  industry ;  the  diminished  profits  in 
that  trade,  and  the  innumerable  dependent  and  connected 

1  Giffen,  Growth  of  Capital,  145  ;  Cohn,  §  390.  For  the  stimulus  to  in- 
dustry, Sir  F.  Abel's  presidential  address  to  the  British  Association  at  Leeds, 
Report  (1890),  25. 

•  Bk.  ii.  ch.  3.  '  The  Industrial  Domain.' 

3  Leslie,  140,  who  adds  some  striking  instances. 

4  Cairnes,  ut  sup.  223. 

F 


66  PUBLIC   FINANCE.  [BOOK  I. 

occupations  would  soon  be  shown  in  the  reduced  income- 
tax  returns  under  Schedule  D,  and  would  so  far  affect  the 
state  receipts  at  a  time  of  extra  pressure.  It  is  needless 
to  add  that  the  revenue  would  almost  certainly  be  acted  on 
by  other  results  of  war,  and  not  beneficially.  A  continental 
State  would  suffer  perhaps  in  a  different  way.  Some  of 
its  territory  might  be  occupied  by  the  enemy,  and  its  con- 
tributions suspended,  or  under  the  most  favourable  circum- 
stances the  productive  powers  of  the  community  would  be 
reduced  by  the  withdrawal  of  so  many  men  from  their 
usual  employments,  with  the  natural  result  of  diminishing 
the  yield  from  taxation 1.  All  such  elements  form  part  of 
the  financial  considerations  appropriate  to  the  subject. 

To  make  the  estimate  a  fair  one,  it  is  further  desirable 
to  take  into  account  the  possible  advantages  so  forcibly 
stated  by  Wagner2  and  others.  They  are:  the  ennobling 
effect  of  warfare  on  men,  and  even  its  value  as  an  economic 
discipline  ;  its  tendency  to  bring  about  a  better  grouping 
of  nations  (as  in  the  recent  cases  of  Germany  and  Italy) ; 
and  finally  the  fact  that  successful  warfare  may  allow  of 
the  cost  being  placed  on  the  vanquished.  It  might  be 
added  that  some  periods  of  war  have  been  seasons  of  high 
profits,  as  was  the  case  in  England  during  the  French  wars 
of  1793-1815.  But  after  all  these  supposed  gains  are  not 
a  set-off  against  the  certain  losses.  There  is  no  evidence 
that  war  promotes  higher  social  or  economic  training3. 
Under  given  conditions,  capitalists  may  gain  by  it,  but 
only  at  the  expense  of  other  classes.  The  power  of 
placing  all  the  expense  on  the  conquered  party  is  not 
a  diminution  but  simply  a  shifting  of  the  burden,  as 
happened  in  the  Franco-German  war  of  1870-1  4.  And 
the  redistribution  is  not  always  purely  beneficial  to  the 

1  Leslie,  141.  2  i.  416  sq. 

3  For  an  admirable  statement  of  the  evils  of  war  see  the  essay  on  'The 
evolution  of  peace,'   in  Lawrence,    Essays  on   Modern  International  Law, 
234  sq. 

4  Giffen,  Essays  in  Finance  (ist  Series),  1-55,  gives  an  estimate  of  the  cost 
of  that  war. 


CHAP.  II.]  THE   COST  OF   DEFENCE.  67 

winning  side,  while  it  intensifies  the  suffering  of  the  defeated 
State. 

§  9.  In  conclusion  it  may  be  said  that  war  and  prepara-  I 
tion  for  war  are  by  far  the  heaviest  charges  on  the  resources 
of  modern  States l.  An  enormous  sacrifice  of  labour-power 
and  of  commodities  is  inevitably  caused  by  its  persistence  as 
a  usage  among  modern  nations.  The  uncertainty  and  inde- 
finiteness  of  the  requirements  of  States  for  this  end  is  a  per- 
turbing element  in  financial  arrangements.  War  has  been  the 
principal  cause  of  the  great  state  indebtedness  so  general  in 
Europe,  and  of  the  severe  pressure  of  taxation.  It  is  conse- 
quently beyond  reasonable  doubt  that  peaceful  methods  of 
settling  disputes,  or  limitations  of  the  present  rigour  of  bel- 
ligerent rights  2,  are  not  merely  social,  moral,  or  even  eco- 
nomic reforms  :  they  are  further  of  the  greatest  financial  im- 
portance. Arrangements  for  disarmament,  if  possible,  would 
belong  to  the  same  class.  But  while  strongly  insisting  on 
the  great  advantages  that  are  certain  to  result  from  the 
maintenance  of  peace,  and  the  reduction  of  military  and 
naval  expenditure,  it  is  quite  as  essential  to  assert  that  so 
long  as  present  conditions  last,  a  well-organized  and  effective 
system  of  defence  is  a  necessary  part  of  state  expenditure, 
and  one  that  amply  repays  its  cost  by  the  security  that  it 
affords  for  the  political  independence  as  well  as  the  economic 
interests  of  the  nation.  To  maintain  a  due  balance  between 
the  excessive  demands  of  alarmists  and  military  officials, 
and  the  undue  reductions  in  outlay  sought  by  the  advo- 
cates of  economy,  is  one  of  the  difficult  tasks  of  the  states- 
man. In  endeavouring  to  attain  to  the  due  mean,  many 
specially  financial  considerations  have  to  be  noticed. 
Among  these  are  :  the  relation  of  state  to  national  revenues ; 
the  risks  to  which  unsuccessful  war  would  expose  the 
country ;  and  the  comparative  urgency  of  the  other  claims 
on  the  State.  The  application  of  the  amount  judged 

1  See  note  at  end  of  chapter. 

2  The  exemption  of  private  property  at  sea  from  capture  is  the  most  obvious 
and  desirable  reform  in  this  direction. 

F  2 


68 


PUBLIC    FINANCE. 


[BOOK  I. 


necessary  is  also  difficult  to  determine.  It  has  to  be  dis- 
tributed between  services  (Personalbedarf]  and  commodi- 
ties (Reatbedarf),  so  as  to  secure  the  maximum  advantage, 
but  this  latter  question  lies,  strictly  speaking,  outside  the 
limit  of  Finance,  and  belongs  to  military  administration. 

NOTE. 

The  growth  of  expenditure  for  military  and  naval  purposes  is  very  plainly 
shown  in  the  following  tables : — 

TABLE  I. 
Expenditure  of  England  and  France  on  Army  and  Navy  at  different  periods. 


ENGLAND.                                                FRANCE. 

Year.                         Amount.                        Year.                      Amount. 

1775 

. 

£3,810,000 

1774 

.. 

£4,880,000 

1823 

.. 

14,350,000 

1830 

. 

12,960,000 

1847 

18,500,000 

1847 

19,320,000 

1857-8     . 

.     a 

23,500,000 

1858 

19,960,000 

1868-9     . 

. 

26,891,000 

1868 

26,320,000 

1878-9     . 

30,252,000 

1878 

, 

29,240,000 

1889-90  . 

.     . 

32,781,090 

1890 

. 

37,640,000 

TABLE  II. 

Military  and  Naval  expenditure  of — 
(a)  THE  GERMAN  EMPIRE. 
Year.  Amount. 

1873         £19,200,000 

1876         21,900,000 

1883-4     22,750,000 

1888-9     41,900,000 

1890-1  (estimate)  35,450,000 


(b)  ITALY. 
Year.  Amount. 

1862  £8,500,000 

1869  ... 

1875  ... 

1880  ... 

1886  , 


1890 


6,800.000 
8,760,000 
10,120,000 
13,120,000 
14,500,000 


TABLE  III. 
Total  Military  and  Naval  expenditure  of  the  Six  Great  Powers  *. 

Year.  Amount. 

1868  £104,250,000 

1873  124,450,000 

1882  146,460,000 

1888  180,200,000 

Whatever  qualification  may  be  requisite  in  consequence  of  the  above  figures 
being  obtained  from  different  sources,  it  cannot  affect  the  general  conclusion 
that  they  are  adduced  to  support — the  increase  of  expenditure  for  the  purposes 
of  defence  and  aggression. 


1  Austria,  England,  France,  Germany,  Italy,  and  Russia. 


CHAPTER    III. 

JUSTICE  AND  SECURITY. 

§  1.  IN  tracing  the  gradual  development  of  state  func- 
tions, we  found  that  the  maintenance  of  internal  security, 
the  protection  of  each  member  of  the  society  against  *  the 
injustice  or  oppression  of  every  other  member  of  it,'  or  in 
more  modern  phrase  the  establishment  of  law  and  order, 
was  a  task  that  was  attempted  in  the  early  stages  of  social 
evolution,  and  one  that  became  more  fully  emphasized  as 
political  institutions  grew  in  strength.  The  necessity  of 
the  function  is  admitted  by  all  except  the  most  advanced 
anarchists.  In  fact  the  extreme  urgency  of  the  claim  for 
public  activity  in  this  respect,  has  frequently  led  to  a  com- 
parative neglect  of  other  sides  of  state  duty.  Both  in  its 
social  and  economic  results  the  establishment  of  security 
is  of  the  utmost  importance ;  but  there  is  the  danger  of 
limiting  its  range  too  narrowly.  All  institutions  and  legis- 
lative measures  that  tend  to  increase  the  power  and  re- 
sources of  the  State  so  far  conduce  to  the  preservation  of 
order,  and  this  wider  point  of  view  should  never  be  ignored, 
though  it  is  necessary  to  give  the  most  prominent  place  to 
the  agencies  directly  employed  in  promoting  the  end. 

An  instance  of  the  disposition  to  unduly  confine  the 
subject  is  found  in  the  Wealth  of  Nations.  The  section  of 
the  work  devoted  to  this  topic  deals  solely  with  the  ad- 
ministration of  justice.  Adam  Smith  appears  to  have  be- 
lieved that  the  one  matter  of  importance  for  the  State  was 
to  decide  disputes,  though  his  account  of  the  introduction 


70  PUBLIC   FINANCE.  [BOOK  f. 

of  law  courts  shows  that  it  is  just  as  essential  to  suppress 
disorder.  The  sovereign  does  certainly  discharge  a  most 
useful  function  in  settling  controversies  about  the  precise 
nature  of  private  rights  and  duties  ;  but  besides  the  claims 
of  individuals,  there  is  the  whole  body  of  public  law,  and 
even  individual  rights  have  to  be  determined  in  respect  to 
their  orbit  and  incidence  by  the  State.  The  ultimate  aim 
is  the  promotion  of  social  welfare  by  the  establishment  of 
security  which  may  be  secured  in  two  different  ways, 
with  very  dissimilar  financial  effects.  '  The  Legislature 
may  pass  laws  which  give  certain  rights  and  remedies  to 
the  persons  interested,  and  may  leave  it  to  them  to  enforce 
the  law  by  taking  their  own  proceedings,  according  to  their 
own  interests,  in  the  courts  of  law.  In  this  case  the  courts 
are  the  organs  through  which  the  State  exercises  its  power. 
Or,  again,  the  Legislature  may  intrust  the  duty  of  enforcing 
the  law  to  an  executive  department  which  then  becomes 
the  organ  of  the  State  for  the  purpose1.'  The  former 
method  would  come  under  the  head  of 'justice' ;  the  latter 
under  that  of '  police '  or  '  administration,'  and  it  is  a  signifi- 
cant fact  that  it  is  not  noticed  by  Adam  Smith.  His  whole 
economic  system  on  its  practical  side  (in  this  respect  in 
strict  agreement  with  the  Physiocratic  position)  was  a 
protest  against  the  older  paternal  policy.  He  had  no 
conception  of  the  development  of  administration  and  super- 
vision for  social  and  even  economic  ends,  which  is  so 
characteristic  of  the  modern  State,  and  consequently  his 
work  presents  a  gap  in  regard  to  this  important  subject. 

The  modern  student  of  Finance  is,  however,  compelled 
to  take  the  different  elements  of  justice  and  administrative 
police  into  account  when  seeking  to  estimate  the  cost  in- 
curred in  guarding  the  rights  of  private  persons,  and  the 
security  of  the  community  which  is  an  essential  condition 
precedent  to  the  former  object.  The  growth  of  expenditure 
in  this  direction  has  been  very  large,  and  presents  some 
serious  financial  problems. 

1  Farrer,  State  and  Trade,  6. 


CHAP.  III.]  JUSTICE   AND   SECURITY.  71 

§  2.  Though  many  of  the  details  of  legal  development 
are  as  yet  obscure,  its  broad  outlines  have  been  sufficiently 
elucidated  by  the  labours  of  the  historical  jurists  1m  In  the 
primitive  community  custom  is  binding  ;  violations  of  its 
prescriptions  are  offences,  but  any  disputes  as  to  the  fact 
of  a  breach  of  the  customary  rule  have  to  be  decided  by 
the  opinions  of  the  tribal  or  village  assembly.  As  soon  as 
the  chief  comes  into  existence  the  decision  of  controversies 
becomes  one  of  his  tasks — or  privileges,  the  submission  of 
the  parties  is,  notwithstanding,  voluntary,  at  least  in  appear- 
ance, and  the  Judge  is  entitled  to  a  'fee'  for  his  services2. 
Under  such  conditions,  justice  is  a  matter  of  special  bargain. 
The  chief  as  judge  or  arbitrator,  gives  his  time  and  attention 
to  the  decision  of  disputes,  and  like  any  labourer  is  'worthy 
of  his  hire.'  Very  many  legal  systems  afford  evidence  of 
the  existence  of  this  dealing  out  of  the  commodity,  justice, 
and  of  the  slow  process  by  which  voluntary  submission 
became  compulsory. 

At  a  far  later  stage  of  growth  and  even  when  the  coer- 
cive power  of  the  sovereign  State  was  fully  established,  this 
idea  of  *  service  for  service '  was  retained.  The  financial 
significance  of  such  a  view  is  apparent.  As  long  as  the 
suitors  paid  fees  for  the  services  of  judges  there  was  no 
need  for  including  the  item  in  the  public  expenditure. 
Even  if  entered  it  would  only  be  a  matter  of  account,  the 
receipts  balancing  the  outlay  3. 

First  appearances  are  in  favour  of  this  arrangement. 
The  public  revenue  is  exempted  from  charge  ;  the  persons, 
who  are  supposed  to  gain,  have  to  pay  for  a  service  rendered, 
and  judges  are  stimulated  to  diligence  by  the  hope  of  re- 
ward. The  operation  of  individual  interest  has  produced 
a  satisfactory  result.  So  plausible  is  the  view  that  it  was 
maintained  by  Adam  Smith.  But  before  his  time  the 

1  Maine,  Ancient  Law,  ch.  10  ;  Early  Institutions,  chs.  9  and  10. 

2  Cp.  Maine,  Early  Law  and  Custom,  185  n. 

3  If  the  fees  were  so  large  as  to  leave  a  surplus  after  paying  salaries  and 
other  expenses,  '  Administration  of  Justice '  might  have  to  appear  in  Bk.  ii. 
as  one  of  the  departments  of  '  State  Industry/ 


72  PUBLIC    FINANCE.  [BOOK  I. 

practical  weakness  of  the  system  was  so  apparent  that  the 
abolition  of  all  law  charges  was  advocated,  and  Bentham 
had  little  difficulty  in  showing  the  mistake  of  the  older  view. 
It  based  its  case  on  a  series  of  false  comparisons.  The 
judge — and  every  judicial  official — is  indeed  a  labourer  dis- 
charging a  most  useful  service  even  in  a  strictly  economic 
estimation  ;  but  his  toil  is  for  the  interests  of  the  society  at 
large,  and  he  ought  to  be  paid  out  of  the  fund  created 
indirectly  through  his  work,  that  is,  the  increased  wealth  of 
the  society  owing  to  an  exact  administration  of  justice  and 
the  consequent  increase  of  security.  If  lawsuits  always 
arose  from  mistakes  there  might  be  something  to  be  said 
for  compelling  the  parties  in  fault  to  pay  for  the  correction ; 
such  is  not  a  usual  case ;  far  more  often  they  arise  from 
intentional  wrong-doing  by  one  party,  or  in  many  instances 
through  the  difficulty  of  knowing  the  law.  The  innocent 
suitor  is  not  a  special  gainer  by  the  action  of  law :  he  is  in 
rather  a  worse  position  than  those  who,  by  the  restraining 
effect  of  justice  have  been  saved  the  necessity  of  asserting 
their  rights.  The  great  advantage  that  a  legal  system  sus- 
tained by  fees  gives  to  the  rich  is  an  additional  argument 
against  it,  as  is  also  the  tendency  of  payment  by  fees  to 
foster  judicial  corruption.  A  court  supported  by  charges 
on  suits  would  be  likely  to  work  so  as  to  increase  those 
charges,  and  might  not  be  strictly  scrupulous  in  the  methods 
adopted. 

The  theory  besides  is  only  applicable  to  civil  courts. 
Suppose  the  criminal  courts  are  to  be  sustained  by  the 
parties — one  of  those  parties  is  the  State,  and  it  must  draw 
its  contribution  from  the  public  revenue.  A  possible  source 
of  revenue  may  be  suggested  in  the  penalties  inflicted  on 
wrong-doers.  Unfortunately  this,  which  so  far  as  it  goes 
is  very  suitable,  proves  insufficient.  In  many  cases  there 
is  not  enough  to  compensate  the  individual  sufferers.  The 
offender — either  civil  or  criminal — may  have  no  available 
property,  and  we  therefore  find  ourselves  forced  to  the 
conclusion  that  the  cost  of  justice  should  be  defrayed  by 


CHAP.  III.]  JUSTICE  AND   SECURITY.  73 

the  State.  Nor  so  long  as  due  care  is  observed  in  scruti- 
nizing the  outlay  is  there  any  form  of  public  expense  that 
is  more  amply  justified.  On  the  due  administration  of 
justice  depends  in  a  great  degree  the  prosperity  of  a  country. 
The  outlay  incurred  for  it  ought  not  to  be  regarded  as  a 
deduction  from  a  definite  and  pre-determined  fund  ;  it  is 
more  correctly  a  percentage  levied  on  wealth,  that  but  for  it 
would  never  have  existed  l. 

§  3.  In  regard  to  justice  as  to  defence  it  is  possible  to 
adopt  different  methods  of  supplying  the  state  require- 
ments consisting  in  this  case  chiefly  of  services.  As  Ger- 
many has  given  the  world  the  greatest  example  of  forced 
military  duty,  affording  a  model  that  has  been  widely 
imitated,  so  has  England  supplied  the  most  striking  and 
impressive  instance  of  compulsory  civic  service.  The  jury 
system  of  the  United  Kingdom,  though  it  does  not  enter 
into  the  national  accounts,  is,  notwithstanding,  a  heavy  tax 
on  those  who  are  subject  to  it,  and  should  be  taken  into 
account  in  estimating  the  national  burdens. 

Continental  legal  systems  economize  in  another  direction. 
By  placing  judicial  salaries  at  a  lower  scale  the  work  is 
done  by  an  inferior  class  of  men  2,  but  then  they  are  en- 
abled to  employ  a  larger  staff  and  can  secure  a  quicker 
disposal  of  cases.  In  this  they  are  aided  by  the  superiority 
in  form  of  their  laws.  A  less  skilled  judge  can  deal 
successfully  with  the  definite  rules  of  a  Code,  when  he 
would  fail  under  the  English  method  of  case-law. 

Whatever  mode  be  adopted  the  total  cost  of  the  legal 
system  is  not  light  as  the  figures  show,  and  it  tends  to  in- 
crease with  the  growth  of  population  and  industrial  inter- 
course 3. 

§  4.  Voluntary  service  contributes  towards  the  perform- 

1  The  statement  in  the  text  does  not  exclude  the  levying  of  fees  for  various 
legal  acts.     This  side  of  the  question  is  considered  infra  Bk.  ii.  ch.  4  and  Bk. 
iv.  ch.  8. 

2  Promotion  on  the  Continent  is  said  to  be  from  the  bench  to  the  bar,  a  com- 
plete reversal  of  English  ideas. 

3  See  table  at  end  of  chapter. 


74  PUBLIC    FINANCE.  [BOOK  I. 

ance  of  judicial  work.  As  England  has  a  volunteer  army 
so  she  possesses  a  volunteer  judiciary  in  the  unpaid  justices 
who  discharge  the  lower  tasks  of  courts  of  first  instance 
and  are  rewarded  by  the  consideration  that  attaches  to 
their  office,  and  by  the  reflection  that  they  have  '  done  their 
duty.' 

The  Germans,  and  Gneist  in  particular,  place  great 
weight  on  the  advantages  of  *  Self-government '  as  it  exists 
in  England  and  is  being  gradually  introduced  into  Prussia. 
It  is  nevertheless  of  doubtful  efficiency  ('justices' justice' 
has  long  been  a  byword),  and  from  the  financial  point  of 
view  the  gain  is  not  great.  At  all  events,  the  system  of 
unpaid  magistrates  is  only  suited  for  thinly  peopled  districts, 
where  small  offences  are  comparatively  few  in  number,  and 
where  the  administrators  command  respect  by  their  social 
position.  Civil  cases,  above  the  lowest,  have  to  be  referred 
to  a  paid  official — the  county-court  judge  ;  and  the  criminal 
jurisdiction  over  large  cities  is  given  to  well-trained  and 
salaried  magistrates,  since  the  work  would  be  beyond  the 
power  of  volunteer  service. 

Thus  self-help,  or  rather  free  public  service,  turns  out  to 
be  a  valuable  aid,  but  impracticable  as  a  sole  or  even  a 
chief  resource. 

§  5.  Next  to  the  cost  of  law,  the  outlay  on  '  police ' 
requires  notice.  The  general  term  '  police  '  has  been  used 
in  a  wide  sense  1  ;  we  may,  however,  limit  it  to  its  modern 
meaning.  In  this  application  it  is  of  very  recent  growth. 
Formerly  each  citizen  was  in  some  degree  prepared  to 
defend  himself,  or  belonged  to  some  body  or  group  that 
would  protect  him  more  or  less  effectually  against  aggres- 
sion. All  difficulties  finally  came  to  the  tribunals.  Now 
the  State  is  held  bound  to  have  a  force  on  hand  to  suppress 
disorder  and  bring  criminals  to  justice.  The  absence  of 
a  police  force  from  any  scene  of  disturbance  is  regarded 
as  a  grievance,  the  support  of  order  being  supposed  to 

1  Thus  we  find  '  Police  of  commerce,'  and  even  the  '  Police  State,'  for  a 
system  of  paternal  legislation. 


CHAP.  III.]  JUSTICE  AND   SECURITY.  75 

concern  it  solely.  A  series  of  causes  has  tended  to 
produce  this  remarkable  change  in  public  feeling ;  they 
are: — (i)  The  increase  of  population  and  its  great  density 
in  certain  areas  affording  naturally  a  greater  facility  for 
escape  to  offenders  ;  (2)  the  alteration  in  manners  that  has 
abolished  the  custom  of  carrying  arms  ;  (3)  the  modern 
industrial  system  with  the  consequent  accumulation  of 
valuable  commodities,  many  of  them  incapable  of  being 
identified  ;  (4)  the  development  of  agencies  for  locomotion 
and  the  facilities  for  escape  thereby  obtained,  while  pursuit 
though  difficult  to  an  individual  is  still  easy  for  an  organ- 
ized body.  The  financial  outcome  of  these  normal  forces 
has  been  a  great  increase  both  in  central  and  local  expendi- 
ture for  the  purpose  of  maintaining  police  forces  engaged  in 
supporting  and  facilitating  the  action  of  courts  of  justice  as 

^also  in  preventing  outbursts  of  disorder  1. 

\  §  6.  The  penal  system  stands  on  the  borderland  between 
*  police  '  and  administration.  When  the  judge  and  police- 
men have  dealt  with  the  criminal,  he  is  handed  over  to 
the  jailor,  and  in  this  department  of  state  outlay  also  there 
has  been  a  noticeable  change  during  the  last  century. 
Ancient  societies  treated  offenders  in  a  summary  way. 
They  were  executed  or  reduced  to  slavery,  so  that  the 
problems  of  prison  expenditure  or  management  did  not 
arise.  The  mediaeval  idea  was  quite  as  barbarous  though 
not  so  efficient.  Criminals  who  escaped  death  were  the 
objects  of  great  cruelty  as  well  as  at  times  of  undue 
lenity2. 

The  more  humane  spirit  of  the  eighteenth  century 
brought  about  a  salutary  change.  Under  the  influence  of 
the  teachings  and  practical  work  of  Beccaria,  Bentham,  and 
Howard,  continued  by  their  many  followers  in  their  various 
lines  of  exertion,  the  whole  system  of  criminal  legislation 
and  penalties  was  remodelled.  Punishment,  instead  of 
being  regarded  as  the  vengeance  of  the  State  or  the 

1  See  note  at  end  of  chapter. 

2  See  Du  Cane,  The  Punishment  and  Prevention  of  Crime,  chs.  1-3. 


76 


PUBLIC   FINANCE. 


[BOOK  I. 


individual,  was  transformed  into  an  agency  for  prevention 
and  reformation.  Executions  became  few  in  number,  and 
prisons,  from  being  purely  places  for  confinement,  were 
used  for  purposes  of  discipline  and  instruction. 

The  necessary  financial  result  has  been  a  considerable 
increase  of  expenditure.  Prisons  and  convict  stations  are 
formed  on  an  elaborate  scale,  with  careful  -provision  for 
the  health  of  the  inmates.  The  comparative  leniency  of 
sentences  has  further  tended  to  perpetuate  the  class  known 
as  '  habitual  criminals.'  This  small  body — for  such  it  really 
is  in  all  civilized  countries — is  yet  responsible  for  the 
greater  part  of  the  outlay  on  *  crime  and  police.'  Any 
effectual  method  of  dealing  with  proven  *  habituals  '  would 
be  a  financial  as  well  as  a  social  benefit.  Even  under  the 
present  arrangements  the  outlay  on  the  *  penal  system  '  is 
in  the  strictest  sense  productive  or  at  least  preservative  of 
wealth. 


NOTE. 

The  following  table  shows  the  increased  cost  of  the  maintenance  of  internal 
security  in  England  and  France. 


Year. 
1825 
1837 
1853 
1868-9     ... 
1880-1     ... 
1889-90  ... 

Amount  expended  by 
Central     Govern- 
ment in  England 
on    Jiistice     and 
Police. 

£  217,000 

357,°°° 
2,220,000 
4,650,060 
6,600,000 
6,800,000 

Year. 
1822 

Cost    of  ministry 
of    Justice     in 
France. 
£  746,600 

1840     ... 
1850     ... 
1860 

834,000 
1,077,000 
1,204,000 

1880     ... 
1890     ... 

1,422,000 
1,498,750 

To  these  amounts  various  local  expenses  should  be  added  for  England ;  and 
to  get  the  cost  of  police  for  France  the  outlay  for  Gendarmerie,  which  is 
charged  under  the  account  for  'war'  and  in  1888  reached  almost  ;£i ,600,000, 
should  be  included. 


CHAPTER    IV. 

ADMINISTRATIVE  SUPERVISION.     POOR-RELIEF. 

§  1.  THE  modern  State  has  in  some  respects  added,  if 
not  exactly  to  the  classes  of  objects  under  its  care,  at  least 
to  the  complexity  of  the  tasks  connected  with  those 
classes.  It  is  still  possible  to  stretch  Adam  Smith's 
description  of  state  functions  so  as  to  include  the  subjects 
of  the  present  chapter,  but  the  extension,  though  con- 
forming to  the  letter,  hardly  agrees  with  the  spirit  of  that 
well-known  statement.  In  this  instance  we  have  a  good 
example  of  the  way  in  which  public  tasks  are  conditioned 
by  the  circumstances  of  time  and  place,  and  of  the  im- 
possibility of  using  an  inflexible  formula  to  guide  the 
course  of  social  action.  The  expansion  of  administrative 
supervision  in  the  last  fifty  years  has  placed  a  fresh  series  of 
duties  on  public  authorities.  A  century  ago  there  was 
little  of  the  kind  in  England,  and  the  older  French  and 
German  systems  of  regulation  we.e  in  a  state  of  decay. 
The  French  Revolution  of  1789  was  believed  to  have 
removed  these  checks  on  individual  liberty,  and  to  have 
secured  by  its  influence  their  ultimate  abolition  in  other 
continental  States.  The  passage  from  the  Ancieu  Regime 
was  regarded  as  definitely  accomplished. 

Such  expectations  have  proved  unfounded  ;  old  methods 
of  control  and  supervision  have  indeed  for  the  most  part 
disappeared1  and  no  one  advocates  their  re-establish- 

1  E.g.  the  restraints  so  forcibly  criticised  in    Target's  Eloge  de  Gournay 
could  not  exist  now.     Turgot,  i.  266-270. 


78  PUBLIC    FINANCE.  [BOOK  I. 

ment.  In  their  place  we  have  a  newer  body  of  arrange- 
ments for  the  regulation  of  various  parts  of  social  life. 
Under  an  elaborate  system  of  legislation  a  large  official 
body  has  been  created  for  the  purpose  of  regulating  the 
free  movement  of  the  ordinary  citizen.  There  are  inspectors 
of  mines,  factories,  shipping,  railways,  tramways,  hackney- 
carriages,  &c.  The  soundness  and  purity  of  articles  of 
food  are  tested  by  public  agents.  Many  trades  are  placed 
under  special  rules,  and  local  authorities  are  entrusted 
with  wide  discretionary  powers  in  their  dealings  with  the 
habits  and  occupations  of  the  communities  under  their 
charge l.  The  foregoing  account,  applicable  in  all  points 
to  the  United  Kingdom,  holds  true  generally  of  all  modern 
States  ;  there  may  be  differences  in  detail ;  the  power 
which  exercises  supervision  may  be  local  in  one  country, 
and  central  in  an  other,  nevertheless,  the  broad  fact  remains 
that  both  in  Europe  and  America  the  department  of 
'  administration '  is  increasing  in  extent 2.  Opinions 
may  and  do  differ  widely  as  to  the  merits  of  this  move- 
ment 3,  but  on  the  point  most  pertinent  for  our  present 
inquiry  there  can  be  no  dispute,  viz.  the  increase  of  ex- 
penditure that  necessarily  results  from  it.  The  budget  of 
every  civilized  society  is  swollen  by  the  charges  needed 
for  the  salaries  of  agents  engaged  in  the  work  of  inspection 
and  regulation,  while  the  total  cost  can  only  be  ascertained 
by  combining  the  general  and  local  outlay. 

§  2.  Some  of  the  causes  of  the  great  increase  in  adminis- 
trative outlay  have  been  noticed  when  dealing  with '  police.' 
They,  however,  deserve  a  more  precise  statement : — (i)  The 
great  growth  of  centres  of  population  makes  organization 

1  Farrer,  State  and  Trade,  and  Cunningham,  Economics  and  Politics,  both 
describe  this  movement,  but  with  divergent  sentiments. 

2  For  the  United  States,  see  Bryce,  American  Commonwealth,  ch.  91.     For 
the  English  Colonies,  Dilke,  Problems  of  Greater  Britain,  508. 

3  Farrer  and  Cunningham,  as  above.      For  a  vigorous  protest  again?t  the 
tendency  see  H.  Spencer,  State  and  Man,  the  recent  work  A  Plea  for  Liberty, 
and  the  publications  of  the  Liberty  and  Property  Defence  League  ;  also  Leon 
Say,  Socialisme  d'Etat. 


CHAP.  IV.]  ADMINISTRATIVE   SUPERVISION.  79 

and  control  more  necessary,  e.  g.  to  employ  a  body  of 
police  to  regulate  the  traffic  in  a  country  road  would  be 
absurd  ;  in  the  Strand  or  Regent  Street  it  is  indispensable. 
The  inspection  of  dwellings  in  order  to  prevent  over- 
crowding is  another  prominent  instance.  (2)  The  moral 
sense  of  the  community  stands  at  a  higher  point  now  than 
it  ever  previously  did,  and  as  a  consequence  the  public 
power  is  invoked  to  remove  any  evil  that  shocks  public 
opinion.  The  legislation  as  to  unseaworthy  ships  affords 
an  illustration.  (3)  The  democratic  movement  makes 
interference  with  the  owners  of  capital  or  property  gener- 
ally, as  also  with  large  dealers  in  commodities,  acceptable 
to  the  holders  of  political  power.  (4)  The  establishment 
of  bodies  of  officials  is  carried  on  so  gradually  that  the 
total  expense  entailed  by  the  system  is  never  realized  ; 
the  special  gain  hoped  for  in  each  case  is,  on  the  contrary, 
distinctly  conceived.  (5)  Finally,  the  influence  of  the  pre- 
valent political  and  economic  theories  should  be  added. 
Most  cases  of  actual  state  regulation  would  come  under 
the  exceptions  to  laissez  faire  as  discussed  by  J.  S.  Mill 
and  Dr.  Sidgwick,  they  also  have  been  powerfully  advo- 
cated both  in  Germany  and  America  On  theoretical 
grounds.  It  is  therefore  not  unreasonable  to  assume  that 
this  tendency  of  speculative  thought  has  in  some  degree 
influenced  the  conduct  of  statesmen  1. 

§  3.  The  difficult  question  remains.  How  far  is  this 
outlay  financially  justifiable?  It  may  at  once  be  conceded 
that  many  of  the  ends  sought  are  eminently  praiseworthy, 
and  that  no  supposed  principle  of  abstract  right  ought  to 
hinder  the  adoption  of  measures  of  general  utility.  The 
final  test  must  be  expediency,  but  expediency  in  its  broadest 
sense.  It  is  only  possible  here  to  indicate  some  of  the 
general  considerations  applicable  to  the  problem,  and  which 
have  to  be  used  as  guides  in  each  particular  case,  (i)  The 
pressure  of  taxation,  and  the  probable  sacrifice  that  its 

1  For  a  statement  of  these  causes,  Goschen,  '  Laissez  faire  and  Government 
Interference,'  Addresses.  59-84. 


80  PUBLIC    FINANCE.  [Boon  I. 

increase  for  a  proposed  new  end  would  cause  or  the  advan- 
tage that  would  result  from  its  remission.  (2)  The  possibility 
of  voluntary  agencies  undertaking  the  work  now  carried  out 
by  the  compulsory  power  of  the  State.  Thus  it  should  be 
a  matter  for  deliberation  how  far  Trade  Unions  could  insist 
on  sanitary  provisions  in  factories,  and  associations  of  con- 
sumers guard  against  adulteration  and  fraud  generally. 
The  danger  of  weakening  the  spirit  of  association  by 
hasty  state  intervention  is  not  to  be  overlooked  ;  all  the 
more  that  it  is  inobtrusive  and  cannot  be  readily  weighed. 
(3)  The  extent  to  which  administrative  action  is  really 
effectual  in  meeting  evils,  though  of  extreme  importance,  is 
not  easily  determined.  Sweeping  general  propositions,  to 
the  effect  '  that  individuals  do  things  better  than  the 
State,'  or  that  'the  State  does  things  better  than  indi- 
viduals,' will  not  carry  us  far,  but  the  inertness  of  human 
nature  when  relieved  from  the  stimulus  of  direct  self- 
interest,  and  the  danger  of  official  corruption,  both  suggest 
a  presumption  against  state  interference,  a  presumption  it 
is  true  of  very  different  force  according  to  the  case  in  which 
it  is  used.  The  solution  of  the  problem  belongs  to  the 
statesman,  who  will  not  form  a  less  sound  judgment  by 
taking  general  principles  into  account. 

It  seems  perfectly  certain  that  administrative  expendi- 
ture will  continue  to  increase  more  rapidly  than  the  cost  of 
justice  or  police.  These  latter  move  with  population ; 
the  cost  of  inspection  and  regulation  grows  much  faster ; 
it  is,  too,  more  divided  and  not  so  definitely  ascertainable, 
and  may  therefore  be  regarded  in  common  with  military 
and  naval  expenditure  as  presenting  the  principal  difficulty 
for  the  Finance  of  the  future.  Growing  expenditure  implies 
increased  revenue  or  additional  debt,  and  either  means 
extra  pressure  on  the  subjects  of  the  State.  The  duty  of 
seeing  that  all  outlay  is  productive  of  compensating  ad- 
vantage to  the  community  is  more  than  ever  imperative. 

§  4.  The  relief  of  indigence  is  now  in  most  countries  one 
of  the  charges  on  the  public  revenue,  and  has  even  become 


CHAP.  IV.]  POOR-RELIEF.  8l 

at  times — as  in  England  under  the  old  poor-law — a  heavy 
burden  ;  it  has  not  however  been  assigned  a  prominent 
place  in  the  estimates  of  outlay  given  by  financial  theorists. 
The  reasons  of  this  comparative  neglect  are  not  hard  to 
find,  for  (i)  it  has  generally  been  a  local  charge  and  has 
not  found  its  way  into  the  national  budgets,  which  used 
to  occupy  most  attention,  and  (2)  the  question  of  state 
relief  of  pauperism  has  been  one  of  the  contested  questions 
of  economic  policy  It  is  probable  that  Adam  Smith,  who 
does  not  mention  poor-relief  in  his  examination  of  public 
expenses,  disapproved  of  any  form  of  compulsory  aid  to 
distress,  and  his  followers  would  in  most  cases  take  the  same 
view1.  But  though  we  can  thus  explain  the  omission  of 
poor-relief  we  cannot  accept  the  reasons  as  sufficient. 
From  the  point  of  view  of  Public  Finance  it  is  immaterial 
whether  the  State  acts  through  general  or  local  authorities, 
e.g.  in  England  before  the  Act  of  1877,  prisons  were  main- 
tained by  the  counties,  since  the  passing  of  that  measure 
they  are  under  the  Prisons  Commission,  but  in  either  case 
they  involved  a  public  charge.  In  regard  to  the  second 
point  Finance  is  engaged  in  dealing  with  facts,  and  there- 
fore the  existence  of  state  aid  to  those  in  distress  is  a 
valid  reason  for  examining  the  subject.  We  may  at  the 
same  time  admit  that  the  question  of  expediency  in  this 
respect  is  a  most  difficult  one,  involving  as  it  does  reference 
to  a  number  of  political  and  economic  considerations. 

The  problem  presents  itself  in  the  following  way.  In  all 
modern  societies  there  are  persons  who,  by  reason  of  physi- 
cal or  moral  causes,  are  unable  to — or  at  least  as  a  matter 
of  fact  do  not — provide  themselves  with  the  means  of  sub- 
sistence. The  question  then  arises  what  is  to  be  done  with 
this  class  ?  Ancient  societies  relieved  themselves  from  the 
difficulty  by  the  rude  expedients  of  infanticide  and  slavery. 
The  Middle  Ages  met  it  by  the  inculcation  of  private 
charity  by  the  Church,  and  by  the  monastic  institutions.  In 

1  Ricardo,  Works  (ed.  McCulloch),  58-9 ;  Malthus  on  Population  (8th  ed.) 
428  sq. 

G 


82  PUBLIC    FINANCE.  [BOOK  I. 

modern  times  the  insufficiency  and  irregularity  of  private 
relief  has  led  to  state  intervention.  The  break-up  of  the 
mediaeval  system  and  the  resulting  economic  disturbances 
made  it  an  urgent  matter  of  public  policy  to  deal  with  dis- 
tress. The  greater  power  of  the  principal  European  mon- 
archies also  furnished  the  means  in  the  shape  of  legislative 
action,  prescribing  and  limiting  the  conditions  of  relief. 
The  growth  and  expansion  of  the  system  of  public  relief  is 
of  itself  an  argument  in  favour  of  its  expediency  as  meeting 
an  evil  common  to  all  communities  that  have  reached  a 
certain  stage  of  development l. 

This  simple  and  obvious  ground  for  the  policy  has  been 
supported  by  several  arguments  of  a  more  theoretical 
character,  (i)  Thus  it  has  been  urged  that  the  State  is 
'  bound  '  to  relieve  distress.  The  methods  in  use  in  ancient 
times  for  the  suppression  of  indigence  are  happily  impos- 
sible :  private  chanty  is  not  sufficiently  regular,  the  State 
cannot  with  safety  so  far  outrage  the  sentiments  of  its 
citizens  as  to  allow  even  the  poorest  to  perish  by  starvation, 
it  therefore  has  an  imperative  duty  to  discharge  in  the  relief 
of  actual  destitution.  (2)  Another  contention  appeals 
to  justice  rather  than  sentiment.  If  the  relief  of  dis- 
tress were  left  to  voluntary  exertions  it  would  in  fact 
amount  to  an  extra  tax  imposed  on  the  charitable,  who 
would  have  to  pay  more  than  their  due  share  ;  the  niggardly 
escaping  the  payment  of  anything  whatsoever  towards 
what  ought  to  be  a  common  task.  (3)  In  addition  to  justice 
amongst  taxpayers,  the  plea  of  justice  to  the  indigent  may 
be  advanced  ;  it  may  be  said  that  the  real  cause  of  destitu- 
tion is  the  appropriation  of  the  agents  of  production  by 
private  persons,  and  that  consequently  those  in  distress 
may  fairly  claim  at  least  that  minimum  of  subsistence 
probably  attainable  in  a  state  of  nature,  or — to  vary  the 

1  '  Every  society  upon  arriving  at  a  certain  stage  of  civilization  finds  it  posi- 
tively necessary  for  its  own  sake  ...  to  provide  that  no  person  .  .  .  shall  perish 
for  want  of  the  bare  necessaries  of  existence.'  Fowle,  Poor  Law  (ist  ed.)  10, 
who  regards  this  as  the  '  general  principle  '  and  '  cause  '  of  poor-law  legislation. 


CHAP.  IV.]  POOR-RELIEF.  83 

argument  slightly — the  holders  of  property  may  justly  be 
called  on  to  pay  the  amount  required  for  the  relief  of  actual 
want  in  return  for  the  benefits  that  they  obtain  from  the 
present  social  organization,  i.  e.  they  are  asked  a  '  ransom ' 
for  their  possessions  \  (4)  To  these  somewhat  abstract 
arguments,  a  more  direct  and  practical  one  may  be  added. 
Under  the  present  penal  system  2  criminals  are  supported 
in  a  way  that  secures  them  a  tolerable  and  healthy  exist- 
ence :  now  to  deny  to  the  pauper  what  is  thus  guaranteed 
to  the  criminal  amounts  to  an  inducement  to  crime. 

The  force  of  these  several  arguments,  and  the  fact  of  the 
almost  universal  existence  of  public  relief,  would  appear  to 
leave  no  room  for  doubt  on  the  subject,  but  we  find  to  our 
surprise  that  a  formidable  list  of  arguments  may  be  brought 
forward  on  the  other  side.  The  opponents  of  poor-relief 
contend  (i)  that  to  give  support  to  the  non-worker  is 
essentially  '  communistic '  and  that  any  such  system  has 
'  communism  '  as  its  logical  result ;  (2)  that  aid  to  distress 
tends  to  act  on  population  ;  that  therefore  an  increasing 
number  of  applicants  for  assistance  would  present  them- 
selves, until  at  last  the  whole  revenue  of  the  community 
would  be  absorbed  in  their  support ;  (3)  that  the  state 
method  of  relief  demoralizes  the  recipients,  while  (4)  it  in- 
terferes with  the  beneficial  action  of  private  charity  and 
injuriously  affects  the  moral  sentiments  both  of  givers  and 
receivers.  The  more  extreme  foes  of  relief,  public  or 
.private,  would  add  (5)  that  all  relief  (and  therefore  public 
relief)  discourages  providence  and  saving.  Almsgiving  is 
—as  Professor  Newcomb  puts  it — '  a  demand  for  beggars  V 
The  industrial  and  economic  virtues  are,  it  is  said, 
weakened  by  every  attempt  at  distributing  aid.  Finally 
(6)  evidence  has  been  adduced  to  show  that  poor  relief 
lowers  wages,  since  it  allows  the  lowest  sections  of  the 
population  to  work  for  less  than  the  amount  needed  for 

1  Sidgwick,  '  Economic  Socialism,'  Fortnightly  Review,  Sept.,  1886. 

2  Bk.  i.  ch.  3.  §  6. 

3  Political  Economy,  526. 

G  2 


84  PUBLIC    FINANCE.  [BOOK.  I. 

subsistence  by  the  amount  of  relief  that  they  get  from  the 
public  authorities  1. 

§  5.  To  strike  a  true  balance  between  the  opposed  argu- 
ments that  have  been  just  stated  is  indeed  difficult,  but  for 
financial  discussion  it  is  possible  to  arrive  at  a  satisfactory 
result.  In  the  present  position  of  most  modern  societies  a 
methodised  system  of  public  relief  is  indispensable,  and 
therefore  forms  a  legitimate  part  of  public  outlay  ;  nor 
is  it  hard  to  fix  approximately  the  standard  of  relief.  If 
the  treatment  of  the  pauper  should  be  better  than  that  of 
the  criminal,  it  should  on  the  contrary  be  worse  than  the 
standard  of  living  of  the  poorest  self-supporting  labourer,  and 
unhappily  the  limits  as  thus  determined  are  very  narrow. 
For  financial  as  well  as  for  social  and  moral  reasons  all 
relief  should  be  given  in  the  form  prescribed  by  the  State, 
i.  e.  generally c  indoor  maintenance.'  Assistance  from  public 
funds  is  not '  charity,'  from  which  it  should  be  clearly  and  dis- 
tinctly separated,  and  in  no  way  can  this  be  better  accom- 
plished than  by  confining  the  action  of  the  public  agents 
engaged  in  relief  to  a  definite  sphere.  It  may  be  further 
said  that  in  the  administration  of  poor-relief  the  reforma- 
tion of  the  habits  of  those  who  are  indigent  should  be 
aimed  at.  What  the  habitual  criminal  is  in  the  prison  the 
hereditary  pauper  is  in  the  poor-house.  Expedients  calcu- 
lated to  improve  the  morale  of  the  destitute  would  power- 
fully affect  the  productive  power  of  the  nation. 

The  relations  of  private  charity  to  the  system  of  legal  aid 
are  of  extreme  importance.  The  absence  of  any  connexion 
between  the  two  classes  of  agency  is  a  blot  in  most  poor- 
law  arrangements.  We  can  hardly  doubt  that  the  contribu- 
tions of  private  persons  properly  utilized  would  go  very  far 
towards  meeting  the  necessary  outlay  on  those  in  distress, 
with  the  double  advantage  of  economizing  the  public  funds 
for  other  objects,  and  preventing  the  evils  that  result  from 
the  existing  abuses  of  almsgiving.  Discrimination  as  to 
the  causes  of  distress  and  consequently  the  amount  of  relief 

1  See  J.  E.  T.  Rogers,  Economic  Interpretation  of  History,  487. 


CHAP.  IV.]  POOR-RELIEF.  85 

can    be   properly  applied   only  through  the   operation  of 
private  beneficence. 

§  6.  In  addition  to  the  direct  method  of  assisting  actual 
distress  the  State  has  been  often  called  on  to  meet  the 
difficulty  indirectly,  either  by  a  system  of  public  works  or 
by  compulsory  insurance  on  the  part  of  the  workers.  The 
assertion  of  the  *  right  to  obtain  work '  supplied  by  the 
State  is  distinctly  of  French  origin  1.  It  has  never  ob- 
tained full  recognition  in  practice,  as  the  difficulties  it 
would  cause  are  evidently  insuperable.  The  provision  of 
work,  the  mode  of  supervision,  the  rate  of  pay,  and  the 
disposal  of  the  products,  are  each  and  all  so  many  obstacles 
in  the  way  of  its  adoption.  The  economic  effect  on  the  whole 
working  class  would  moreover  be  surely  evil  ;  the  expendi- 
ture would  be  indefinite  and  not  capable  of  easy  control. 
'  Compulsory  insurance,'  as  advocated  in  England  and  in 
some  degree  carried  out  in  Germany,  presents  greater 
advantages,  and  seems  a  more  hopeful  idea,  but  it,  too,  is 
open  to  the  grave  financial  objections  that  the  collection  of 
the  insurance  charges  is  likely  to  be  ineffective  in  a  country 
where  labour  is  allowed  full  freedom  of  movement,  while 
it  involves  the  State  in  serious  financial  operations,  and  at 
the  same  time  weakens  the  action  of  voluntary  effort. 
The  English  friendly  societies  insure  a  large  number  of 
the  more  provident  artisans,  and  have  been  favourably 
contrasted  with  the  foreign  state  insurance  bodies  by  Mr. 
Goschen 2.  A  strict  administration  of  public  relief  en- 
courages the  habit  of  insurance  or  other  provision  against 
distress,  and  the  development  of  such  methods  of  self-help 
makes  it  easier  for  the  State  to  adhere  to  the  rigid  policy  of 

relieving  nothing  except  absolute  indigence. 
y 

1  Droit  au  Travail  quite  different  from  the  Droit  du  Travail. 

2  Addresses,  113  sq. 


CHAPTER    V 
EDUCATION.    RELIGION. 

§  1.  THE  recognition  of  education  as  one  of  the  tasks  of 
the  State  was  a  natural  result  of  the  decline  of  the  influence 
of  the  Church.  The  innumerable  religious  institutions  and 
endowments  of  the  Middle  Ages  had  provided  instruction 
for  youth  as  they  had  provided  sustenance  for  those  in  need, 
and  when  their  endowments  were  in  great  part  seized  by  the 
different  European  sovereigns  some  provision  in  their  place 
or  by  their  diversion  to  the  supply  of  education  was  ob- 
viously suggested.  Even  the  theorists  of  the  eighteenth 
century  hesitated  to  exclude  the  duty  of  assisting  educa- 
tion from  the  sphere  of  state  operations.  The  Physiocrats 
and  Adam  Smith  agreed  in  recommending  state  aid  to  edu- 
cation, but  only  under  such  conditions  as  would  encourage 
efficiency  in  the  teachers  with  industry  and  application  in 
their  pupils x.  Since  their  time  the  tendency  has  been  towards 
the  extension  of  public  effort  in  all  the  departments  of 
education.  The  question  presents  itself  in  connexion  with 
each  of  the  three  forms  of  teaching,  primary,  secondary  or 
intermediate,  and  university. 

§  2.  In  respect  to  primary  education  we  may  note  the 
distinct  expression  of  opinion  by  Adam  Smith  in  favour  of 

1  The  attitude  of  the  Physiocrats  on  the  subject  of  education  is  remarkable, 
and  helps  us  to  understand  their  general  conception  of  state  policy.  It  was  not 
so  much  interference  as  injtirious  interference  that  they  opposed,  but  they  felt 
that  all  state  action  had  elements  of  evil  in  its  disturbance  of  voluntary  action, 
and  its  expense.  Turgot,  ii.  502—551,  Memoire  sur  les  Municipalites>  said  to  be 
the  composition  of  Du  Pont  de  Nemours.  Cp.  Schelle,  362  sq. 


CHAP.  V.]  EDUCATION.  87 

state  facilities  for  this  form  of  teaching.  The  success  of 
the  Scotch  parish  schools  had  evidently  impressed  him,  and 
he  contends  with  great  force  that  the  increased  division  of 
labour  due  to  economic  progress  tends  to  weaken  the  facul- 
ties of  the  workman — and  that  this  evil  can  only  be  counter- 
acted by  education.  The  State  has,  moreover,  he  thinks,  a 
direct  interest  in  the  education  of  the  bulk  of  the  people  in 
order  to  secure  political  tranquillity1.  A  mild  form  of 
compulsion  is  even  allowable,  since  he  suggests  that  passing 
an  examination  should  be  a  necessary  preliminary  to  entry 
into  a  trade.  Adam  Smith  does  not  advocate  free  education, 
but  his  reason  is  curious,  viz.  that  the  teacher's  diligence  is 
stimulated  by  the  receipt  of  fees,  an  aim  that  would  be 
otherwise  reached  through  the  present  result-fees'  system. 

During  the  present  century  the  state-guided  system  of 
primary  instruction  has  become  definitively  established,  as 
an  examination  of  the  details  of  expenditure  will  most 
clearly  show.  The  development  of  this  system  has  brought 
out  the  existence  of  several  difficulties  imperfectly  recog- 
nised at  its  commencement.  Among  those  are: — (i)  The 
problem  of  religious  teaching ;  denominational  schools,  are 
offensive  to  one  section,  undenominational  ones  to  another ; 
and  both  the  amount  and  application  of  state  funds  is  hotly 
contested  by  the  different  parties.  (2)  Distinct  from  the 
foregoing,  but  connected  with  it  is  the  relation  of  state  to 
voluntary  schools.  If  no  fees  are  charged,  the  private 
schools,  in  competition  with  the  public  ones,  complain  of 
the  unfairness,  which  indeed  is  manifest.  On  the  other  hand, 
fees — especially  if  education  is  compulsory — press  heavily  on 
the  poorer  parents.  (3)  When,  to  avoid  some  of  the  fore- 
going puzzles,  payment  by  results  is  made,  there  is  a  danger 
of  superficial  preparation,  and  yet  without  some  test  of  the 
kind,  efficiency  cannot  easily  be  measured.  The  only  com- 
plete escape  from  such  difficulties  would  be  the  abandon- 
ment of  instruction  to  voluntary  effort,  a  solution  which 

1    Wealth  of  Nations,  329-30.     An  argument  also  urged  by  Malthus,  Essay 
on  Population  (8th  ed.),  437  sq. 


88  PUBLIC    FINANCE.  [BOOK  I, 

is  forbidden  by  the  importance  of  education  both  socially 
and  economically,  as  also  by  the  practical  impossibility  of 
securing  it  without  state  aid  in  the  case  of  the  very  poor. 

§  3.  Secondary  education  is  in  a  very  different  position. 
The  older  economists  would  abandon  it  to  the  action  of 
individual  and  family  interest.  There  is,  it  would  appear, 
no  pressing  ground  for  state  exertion  in  order  to  supply 
instruction  superior  to  that  enjoyed  by  the  whole  popula- 
tion. It  may,  therefore,  reasonably  be  left  to  private  initia- 
tive or  to  voluntary  effort,  more  particularly  in  the  form — 
too  often  disregarded  by  economic  and  financial  theorists — 
of  endowments  by  gift  or  bequest.  The  modern  tendency 
is  here,  too,  in  favour  of  an  extension  of  state  action,  gener- 
ally directed  rather  to  supervision  and  readjustment  of 
existing  resources  than  to  the  supply  of  additional  funds. 
In  some  instances  special  agencies  for  testing  the  quality  of 
secondary  education,  either  by  inspection  or  examination, 
have  been  created  1.  From  the  financial  point  of  view  it 
must  be  said  that  outlay  of  this  kind  is  not  to  be  placed  in 
the  same  rank  with  that  in  aid  of  the  primary  instruction  of 
a  country.  At  best  it  belongs  to  the  class  of  useful  outlay, 
and  is  very  likely  to  be  supplied  by  private  funds.  It, 
moreover,  is  open  to  the  objection  of  benefiting  but  one, 
and  that  the  most  independent,  section  of  the  population. 
Against  these  weaknesses  it  may  claim  to  be  of  a  moderate 
character,  and  not  likely  to  seriously  affect  national  finance. 

§  4.  Universities  or,  more  generally,  institutions  for 
higher  education  have  to  be  judged  on  special  grounds  so 
far  as  their  claims  for  state  aid  are  concerned.  It  is  quite 
true,  as  Adam  Smith  shows,  that  the  higher  education  in 
many  cases  is  not  a  necessity  but  rather  a  luxury  or  orna- 
ment that  may  very  well  be  paid  for  by  the  wealthy,  if 
they  desire  it  for  themselves  or  their  families.  In  most  of 
the  remaining  instances  it  is  a  legitimate  investment  in 
immaterial  or  personal  capital,  a  point  of  view  that  pre- 

1  Provisions  of  the  kind  were  made  for  Ireland  in  the  Intermediate  Education 
Act,  1878,  and  for  Wales  in  its  Act,  1889. 


CHAP.  V.]  EDUCATION.  89 

dominates  in  the  minds  of  the  professional  and  commercial 
classes,  so  that  on  either  supposition  there  is  no  call  for 
public  intervention.  State  or  other  endowments  have, 
besides,  the  injurious  effect  of  checking  the  easy  remodel- 
ling of  the  system  of  higher  instruction  in  accordance  with 
the  inevitable  changes  in  scientific  and  literary  studies  1. 
There  is  unfortunately  a  tendency  on  the  part  of  highly 
paid  permanent  teachers  to  take  their  work  in  a  mechan- 
ical manner,  and  expend  their  energies  in  other  directions. 
The  result  of  such  considerations  leads  to  the  suggestion  of 
thorough  reform  in  the  mode  of  higher  education  rather 
than  complete  surrender  on  the  part  of  the  State  of  its 
regulating  functions,  more  especially  when  some  less 
obvious  parts  of  the  working  of  Universities  are  taken  into 
account. 

The  modern  University  has  very  different  elements  and 
may  be  looked  at  from  different  points  of  view.  In  the 
first  place  it  is  a  grouping  of  professional  schools,  and 
here  the  tendency  towards  extended  administrative  action 
almost  compels  the  State  to  form  closer  relations  with 
the  larger  teaching  bodies.  The  increase  in  the  number  of 
professions,  entry  into  which  is  granted  only  on  supposed 
proof  of  competence  as  evidenced  by  examinations  and 
courses  of  study  obtainable  solely  by  means  of  attendance 
at  a  University  College,  affords  a  strong  reason  for  offering 
facilities  towards  getting  the  necessary  instruction.  When 
the  State  imposes  on  candidates  for  various  offices  or  pro- 
fessions the  obligation  of  having  a  University  Degree  or 
something  similar,  it  is  in  fairness  bound  to  supply  them 
with  reasonable  opportunities  for  acquiring  that  needful 
badge.  Moreover,  many  parts  of  administrative  work 

1  '  The  improvements  which  in  modern  times  have  been  made  in  several 
different  branches  of  philosophy,  have  not  the  greater  part  of  them  been  made 
in  Universities.  .  .  .  The  greater  part  of  Universities  have  not  even  been  very 
forward  to  adopt  those  improvements  after  they  were  made,  and  several  of  those 
learned  societies  have  chosen  to  remain  .  .  .  the  sanctuaries  in  which  exploded 
systems  and  obsolete  prejudices  found  shelter  and  protection  after  they  had  been 
hunted  out  of  every  other  corner  of  the  world.'  Wealth  of  Nations,  323. 


90  PUBLIC    FINANCE.  [BOOK  I. 

could  hardly  be  carried  on  without  the  aid  of  the  scientific 
skill  maintained  by  the  teaching  bodies. 

Secondly,  the  importance  of  scientific  research  in  its 
effects  on  the  production  of  wealth  and  in  dealing  with 
many  social  problems  is  now  abundantly  recognised.  Even 
literary  and  historical  inquiries  are  found  in  many  cases  to 
be  of  practical  service  and  to  powerfully  aid  in  the  advance 
of  culture.  The  '  endowment  of  research '  is  a  matter,  if 
not  of  practical  politics,  at  least  of  discussion.  A  Uni- 
versity, however,  is,  or  at  least  ought  to  be,  the  home  of 
research,  and  its  support  by  the  State  may  be  claimed  on 
the  ground  that  it  discharges  this  most  valuable  function. 
Possessing  these  two  departments  which  may  reasonably 
expect  aid  from  public  funds  a  University  naturally  adds 
to  them  a  third  in  supplying  to  the  richer  members  of 
the  society  the  ornamental  education  or  '  culture '  that  they 
demand  and  are  willing  to  pay  for.  By  this  combination 
it  is  further  possible  to  stimulate  the  teachers  by  fees  that 
will  largely  depend  on  the  reputation  and  credit  of  the 
institution  where  they  are  placed. 

§  5.  The  question  of  '  technical '  as  opposed  to  general 
education  presents  itself  in  all  the  stages  of  instruction  and 
in  each  it  raises  the  same  problems.  The  evident  economic 
advantage  that  a  nation  obtains  through  the  skill  of  its 
producers  is  &prima  facie  ground  for  state  aid  being  given 
towards  the  attainment  of  suitable  training.  Expenditure 
for  such  an  object  is  productive  even  in  a  financial  point 
of  view,  and  it  may  be  further  argued  that  individual  or 
family  interest  will  not  suffice  to  accomplish  the  end 
desired.  On  the  other  hand  the  sturdier  individualists  urge 
that  self-interest,  if  good  for  anything,  should  surely  be 
good  for  inciting  men  to  learn  in  the  most  efficient  manner 
the  trades  or  occupations  by  which  they  have  to  earn  a 
livelihood.  The  same  general  result  is  reached  here  as 
elsewhere,  viz.  that  the  true  test  is  experience,  and  it  shows 
that  public  outlay  may  be  of  advantage  in  promoting 
industrial  training  though  it  is  subject  to  the  inevitable 


CHAP.  V.]  EDUCATION.  9! 

drawback  of  all  state  interference  in  its  tendency  to  reduce 
private  exertion,  and  in  the  difficulty  of  duly  regulating 
the  supply  of  skilled  labour  called  out  by  its  action.  The 
acquisition  of  training  for  unprofitable  employments  is  no 
slight  evil  and  under  the  rigid  system  of  regulation  insepar- 
able from  official  management  it  is  not  unlikely  to  occur. 
Even  general  education  may  produce  a  surmenage  scolaire, 
as  the  example  of  France  shows. 

§  6.  Under  the  same  head  the  cost  of  museums,  libraries, 
picture  galleries,  and  institutions  for  promoting  science 
and  art  generally  should  be  placed.  They  come  in  to 
supplement  the  more  directly  educational  agencies  and  are 
often  quite  as  effective  in  promoting  the  ends  aimed  at. 
The  modern  development  in  this  domain  is  remarkable  (es- 
pecially in  England  and  the  United  States).  Central  and 
local  authorities  have  both  made  considerable  efforts 
in  the  direction  of  meeting  the  wants  of  the  popula- 
tion for  opportunities  of  acquiring  information  and  culture. 
Few  large  towns  are  without  appliances  that  were  un- 
known a  century  ago  or  confined  to  national  capitals. 
We  have  to  add  this  expenditure  to  the  cost  of  schools  and 
colleges  before  we  can  say  what  is  the  total  sacrifice  in- 
curred by  a  nation  in  its  public  capacity  for  the  object  of 
culture. 

§  7.  Voluntary  action  may  be  expected  to  relieve  the 
revenues  of  the  State  from  a  great  deal  of  this  charge.  Not 
only  are  the  expenses-of  education  largely  met  by  the  normal 
economic  process  of  payment  for  advantages  obtained  ;  the 
donations  and  bequests  of  the  wealthy  have  supplied,  and 
we  may  hope  will  continue  to  supply,  a  good  many  of  the 
less  profitable  fields  of  instruction  and  research  with  suffi- 
cient endowment.  The  splendid  example  set  by  American 
millionaires  may  produce  good  effect  in  Europe  by  attract- 
ing attention  to  the  benefits  of  supporting  the  educational 
and  investigating  bodies  to  which  civilization  owes  so 
much  T. 

1  Cp.  Cohn,  §  150. 


92  PUBLIC   FINANCE.  [BOOK  I. 

In  any  case  it  must  be  said  that  no  modern  State 
is  likely  to  suffer  financial  embarrassment  through  its 
outlay  in  promoting  education  and  culture.  Measured 
against  the  cost  of  war  and  preparation  for  war,  this 
form  of  expenditure  is  modest  and  inconspicuous  in  the 
total  amount,  and  taken  with  its  probable  advantages 
it  is  the  least  questionable  of  the  many  secondary  heads 
N^of  charge. 

§  8.  The  relations  of  Church  and  State  have  been  at 
different  periods  the  principal  problem  of  rulers.  The 
earlier  sentiment  rather  included  the  State  in  the  Church 
than  the  Church  in  the  State.  Modern  societies  are 
practically  agreed  in  reversing  this  position.  Excluding 
the  polemical  sides  of  the  subject  we  can  see  that  for 
the  financier  the  religious  wants  of  the  community  need 
the  supply  of  particular  forms  of  services  and  commodities, 
and  the  question  arises  whether  the  public  authority  should 
provide  these  needed  objects  or  leave  them  to  private 
effort.  Historical  conditions  have  determined  the  actual 
solution  in  each  country,  while  the  prevalent  theoretical 
view  is  derived  from  the  doctrines  of  the  last  century. 
Adam  Smith,  who  approached  the  subject  under  the  in- 
fluence of  Hume  ly  regards  the  clergy  as  a  particular  form  of 
police  attending  to  spiritual  interests.  His  ideal  is  complete 
non-intervention  on  the  part  of  the  State.  The  probable 
result  would  be  '  a  great  multitude  of  religious  sects '  whose 
fanaticism  might  be  kept  in  check  by -the  two  remedies  of: 
(a)  '  the  study  of  science  and  philosophy,'  and  (b)  '  the 
frequency  and  gaiety  of  public  diversions/  Where,  how- 
ever, there  is  one  predominant  religion  the  State  ought,  he 
thinks,  to  regulate  and  control  or,  to  use  his  significant 
term,  to  '  manage '  it — a  process  that  is  best  carried  out 
by  the  skilful  use  of  the  power  of  bestowing  prefer- 
ment. Religious  endowments  are  regarded  as  a  part  of 

1  See  his  quotation  from  the  latter  (History  of  England,  ch.  29)  whom  he 
describes  as  '  by  far  the  most  illustrious  philosopher  and  historian  of  the 
present  age,'  331. 


CHAP.  V.]  RELIGION.  93 

state  wealth  withdrawn  from  the  more  pressing  end  of 
defence 1. 

The  circumstances  of  the  case  have,  it  need  hardly  be 
said,  been  profoundly  altered  since  1776.  The  United 
States  now  afford  a  remarkable  example  of  the  actual 
working  of  the  policy  of  laissez  faire  in  respect  to  re- 
ligion2, and  they  are  imitated  by  the  English  colonies. 
Continental  nations  show  a  different  set  of  changes : 
the  'Established  Churches'  with  their  numerous  inde- 
pendent and  private  funds  have  given  place  to  bodies 
directly  chargeable  on  the  state  revenues.  The  *  en- 
lightened absolutism  '  of  the  eighteenth  century  commenced 
the  work  of  disendowment,  which  was  further  carried  out 
by  the  revolutionary  movements  since  1789.  Later  reaction 
has  made  the  clergy  pensioners  of  the  State.  As  regards 
the  United  Kingdom,  the  American  example  has  for  special 
reasons  been  followed  in  Ireland  and  seems  likely  to  be 
extended  to  Gre^at  Britain. 

Viewing  the  question  as  one  of  Finance  it  appears  that 
the  expenditure  on  religion,  though  not  large,  can  be  easily 
supplied  by  voluntary  contributions,  and  therefore  is  not 
an  urgent  call  on  public  resources  which  can  be  better 
used  for  other  objects.  When  the  State  for  political 
motives  undertakes  the  supervision  of  religion  and  its 
supply,  concurrent  endowment  is  a  necessity  in  modern 
societies,  as  otherwise  an  evident  injustice  would  be  in- 
flicted on  the  non-endowed  sects.  Such  is  the  policy  of 
most  States  at  present,  but  it  is  more  expensive  owing  to 
the  greater  number  of  ministers,  buildings,  &c.,  that  have 
to  be  provided. 

The  provision  for  religious  teaching  has  a  rather  close 
affinity  to  that  for  education  proper.  Modern  budgets 

1  '  The  revenue  of  every  established  church  ...  is  a  branch,  it  ought  to  be 
observed,  of  the  general  revenue  of  the  State,  which  is  thus  diverted  to  a  purpose 
very  different  from  the  defence  of  the  State,'  341. 

2  'Congress    shall  make  no  law  respecting  an  establishment  of  religion,' 
First  Amendment  to  U.  S.  Constitution.     Some  State  constitutions  contain  a 
similar  provision.     Bryce,  American  Commonwealth  (2nd  ed.),  ii.  570-1. 


94  PUBLIC    FINANCE.  [BOOK  I. 

often  combine  the  two  charges  under  a  single  head.  There 
is  also  an  historical  connexion  between  them,  and  it  is 
noticeable  that  in  countries,  such  as  the  United  States  and 
the  English  colonies,  where  state  endowment  of  religion  is 
given  up,  educational  bodies  take  the  vacant  place.  Public 
expenditure  for  denominational  education  is  a  near  approxi- 
mation to  State  aid  to  religion. 

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CHAPTER    VI. 

EXPENDITURE  ON  INDUSTRY  AND  COMMERCE. 
CONSTITUTIONAL  AND  DIPLOMATIC  EXPENDITURE. 

§  1.  EXPENDITURE  for  directly  economic  objects  has' 
often  occupied  a  large  place  in  public  outlay.  To  foster 
industry  and  commerce  was  long  regarded  as  a  leading 
function  of  the  State.  In  fact,  it  is  to  this  conception  that 
we  owe  the  origin  of  Finance  and  Political  Economy l. 
The  great  object  of  the  Cameralwisscnschaft  of  the  i8th 
century  was  to  give  instruction  as  to  the  right  direction  of 
national  resources,  and  most  of  the  earlier  economic  writers 
of  France  and  England  held  that  it  was  very  important  to 
encourage  economic  enterprise. 

The  complete  revolution  wrought  by  the  combined 
labours  of  the  Physiocrats  and  Adam  Smith  exonerated 
the  State  from  this  difficult,  indeed  impossible,  task  ;  but 
it  is  a  vulgar  error  to  suppose  that  the  advocates  of  in- 
dustrial liberty  did  not  recognise  certain  definite  duties  of 
the  State  in  economic  matters.  Apart  from  the  exaggera- 
tions inevitable  in  so  violent  a  change  of  opinion,  we  see 
that  the  sound  sense  of  Adam  Smith  and  Turgot  fully 
understood  that  in  several  directions  the  Government  could 
beneficially  aid  the  efforts  of  producers 2.  The  necessities 
of  practice  have  made  it  incumbent  on  States  to  undertake 
a  series  of  duties  intended  for  the  advantage  of  industry 
and  commerce. 

1  Introduction,  Part  ii. 

2  Wealth  of  Nations,  Bk.  v.  ch.   i.  part  3.  art.   I.  303  sq.     Cp.  Turgot's 
statement  of  Gournay's  views  in  the  '  Eloge,'  i.  279. 


g6  PUBLIC   FINANCE.  [BOOK  I. 

There  is,  however,  a  distinction  to  be  made  at  the  outset. 
In  one  sense  all  state  expenditure  may  be  said  to  be  for 
the  benefit  of  industry.  The  armies  and  navies  of  modern 
States  are  productive  of  the  security  needed  for  the  protec- 
tion of  industrial  effort.  The  administration  of  justice  and 
the  maintenance  of  an  efficient  police  have  the  same  effect. 
A  great  deal  of  administrative  supervision  has,  or  is  sup- 
posed to  have,  considerable  influence  in  increasing  produc- 
tion. One  of  the  strongest  pleas  for  aid  to  education  is 
based  on  its  economic  value,  and  writers  of  the  School  of 
Hume  would  regard  the  inculcation  of  honesty  and  frugality 
as  the  most  useful  function  of  the  clergy.  So  close  is  the 
consensus  of  social  phenomena  that  there  is  no  part  of 
public  expenditure  that  may  not  aid  the  progress  of  econo- 
mic production. 

§  2.  Besides  this  more  general  action  of  the  State  on 
industry,  there  is  a  special  one.  Portions  of  the  public 
revenue  are  devoted  to  objects  either  solely  or  principally 
economic  ;  and  it  is  the  employment  of  this  part  that  we 
have  now  to  consider.  It  again  may  be  divided  into 
expenditure  on  industry  and  commerce  generally,  and  that 
on  special  trades  or  employments.  Of  the  former  we  may 
notice  the  following  as  the  most  usual : 

(1)  The  cost  of  maintaining  a  monetary  system,  as  in  the 
case  of  the  English  gold  coinage. 

(2)  The  establishment  and  preservation  of  a  system  of 
weights  and  measures. 

(3)  The  enactment  (as  in  some  countries)  of  a  commercial 
code  with  possibly  a  special  tribunal  or  tribunals. 

(4)  Agencies  for  facilitating  communication  and  transport, 
viz.  post  offices,  telegraphic  communication,  roads,  railways, 
and  canals.     In  the  same  group  may  be  included  light- 
houses, surveys  of  coasts  or  new  countries. 

(5)  Consular  and  diplomatic  establishments  chiefly  for 
the  benefit  of  foreign  trade,  but  with  an  indirect  action  on 
home  industry. 

The  slightest  glance  at  the  above  list  at  once  suggests  a 


CHAP.  VI.]      EXPENDITURE  ON  INDUSTRY  AND  COMMERCE.      97 

criticism.  Some  of  the  agencies  included  will,  under  proper 
management,  yield  a  profit  to  the  State,  and  therefore  more 
fitly  belong  to  the  domain  of  state  industry.  The  English 
Post  Office  and  the  Prussian  railways  earn  large  net 
revenues  for  the  States  to  which  they  belong,  and  the 
currency  system  may,  by  the  imposition  of  a  seigniorage 
be  made  to  cover  its  cost,  and  probably  leave  a  surplus. 
The  answer  to  this  difficulty  is  not  hard  to  find.  Granting 
the  truth  of  the  assertion  on  which  it  rests,  the  fact  remains 
that  in  many  cases  the  State  has  to  incur  cost  for  the 
objects  mentioned.  The  gains  of  post  offices  and  railways 
will  be  noticed  in  the  proper  place  l.  There  are,  however, 
some  that  have  a  recurring  deficit  2,  which  has  to  be  met 
out  of  the  funds  derived  from  other  sources.  We  get  but 
one  more  illustration  of  the  difficulty  of  drawing  '  hard  and 
fast  lines '  in  social  inquiry.  What  is  in  one  country  a 
cause  of  expenditure,  is  in  another  a  source  of  gain  as  a  state 
industry,  while  in  a  third  it  yields  revenue  through  taxation. 

§  3.  State  aid  to  special  branches  of  industry  presents 
much  greater  opening  for  objections  ;  but  here,  too,  suitable 
cases  present  themselves.  Among  these  are  : — 

(i)  The  introduction  of  new  and  profitable  industries. 
In  modern  times  this  part  of  state  action  has  been  usually 
carried  out  by  means  of  protective  duties.  The  so-called 
'  infant  industry '  argument  is  one  of  the  best  of  the  protec- 
tionist pleas,  and  its  theoretic  force  has  been  recognised  by 
most  economists,  but  the  question  is  really  a  wider  one. 
The  problem  before  the  statesman  amounts  to  this  :  How 
far  is  it  expedient  to  incur  a  present  loss  for  a  future  gain  ? 
And  on  the  financial  side  the  balance  of  the  different  public 
wants,  as  also  the  percentage  of  the  national  income  ab- 
sorbed by  the  State,  are  elements  to  be  taken  into  account 
in  the  actual  solution.  In  its  simplest  form  encouragement 
is  given  by  means  of  bounties  on  production  or  premiums 

1  Bk.  ii.  ch.  3 ;  Bk.  iv.  ch.  8. 

2  E.  g.  the  Indian  and  Canadian  Posts  and  most  of  the  continental  state 
railways. 

H 


98  PUBLIC    FINANCE.  [BOOK  I. 

for  the  establishment  of  new  industries.  A  protective  duty 
may  be  regarded  as  a  tax  on  the  consumption  of  the  pro- 
tected article  with  an  equivalent  bounty  to  the  home  pro- 
ducer ;  it  is,  therefore,  in  reality  more  complicated  than  a 
simple  bounty.  This  aspect  of  the  matter  may  be  reserved 
for  a  later  stage  of  our  inquiry 1 ;  but  here  we  have  to  note 
the  difficulty  of  escaping  corruption  and  favouritism  in  the 
application  of  a  policy  of  encouragement.  In  an  un- 
developed industrial  system  such  aids,  if  applied  with 
wisdom,  may  afford  a  beneficial  stimulus,  as  was  probably 
the  case  with  some  of  the  measures  of  mediaeval  sovereigns. 
They,  in  some  degree,  occupy  in  economic  policy  the  place 
that  despotic  government  holds  in  political  evolution,  but 
appear  quite  unfitted  for  a  progressive  system  of  industry  2. 
The  direct  support  of  special  branches  of  production  from 
the  public  revenue  is  sure  to  be  a  diminishing  item  of  charge 
in  modern  countries. 

(2)  The  promotion  of  inventions,  by  the  inducement  of 
state   premiums,  or   even  the  encouragement  of  a  higher 
standard  of  excellence  in  production  by  the  same  means, 
has  been  regarded  without  disapproval  by  Adam  Smith. 
Their  effect   is  not  to  disturb  the  natural  distribution  of 
employments ;    besides,  as  he  remarks,   their   cost    is   in- 
significant 3.     A  good  patent  law  will,  however,  be  the  most 
effectual  way  of  facilitating  invention  4. 

(3)  The  periodical  holding  of  exhibitions  of  industrial 
products  under  state  auspices,  and  in  fact  at  the  state's 
expense,  is  now  an  established  custom,  though  it  is  prob- 
able that  the  need  of  agencies  of  the  kind  is  at  present  less 
than  it  formerly  was. 

1  Bk.  iv.  ch.  7. 

2  The  fact  that  the  Anglo-Indian  government  has  adopted  a  policy  of  non- 
intervention so  far  as  industry  is  directly  concerned  is  the  more  remarkable, 
since,  if  ever  there  were  a  case  where  rulers  might  be  supposed  to  be  fitted  by 
superior  wisdom  and  insight  to  direct  their  subjects,  this  would  be  one. 

3  213. 

*  See  Quarterly  Journal  of  Economics,  Oct.  1890, 44-69  ('  A  Century  of  Patent 
Law,'  by  Chauncey  Smith),  for  the  effects  of  the  United  States  patent  laws. 


CHAP.  VI.]      EXPENDITURE  ON  INDUSTRY  AND  COMMERCE.       99 

(4)  Model  institutions,  such  as  agricultural  schools,  &c. 
are  also  frequently  formed. 

(5)  State  subvention  of  railways  and  means  of  transport 
for  the  improvement  of  the  poorer  districts  of  a  country. 

(6)  Outlay  on  the  administration  of  forests  and  drainage 
is,  in  many  countries,  an  important  part  of  the  economic 
expenditure  of  the  State.    The  former  seems  more  properly 
to  belong  to  the  subject  of  the  *  public  domain  '  as  it  usually 
gives  a  surplus. 

(7)  The  support  of  credit  institutions  and  assistance  by 
loans  is  also  more  fittingly  discussed  in  a  later  part  of  our 

I  -  inquiry. 

\\  §  4.  Finally,  we  should  remark  that  the  State  may  find 
itself  called  on  to  act  in  relation  to  any  economic  interest 
of  the  society  that  it  regulates.  There  is  no  strict  and 
universally  binding  rule  that  can  mark  off  the  area  of  its 
action.  The  protest  of  laissez  faire  was  directed  against  the 
policy  of  continual  interference.  The  intervention  of  the 
public  power  should,  however,  be  only  admitted  on  clear 
and  definite  proof  of  its  advantage.  The  best  safeguard 
against  excessive  state  action  is  to  be  found  in  insistence 
on  a  careful  calculation  of  all  the  elements  entering  into 
each  case,  and  more  especially  of  the  financial  relations  that 
it  necessitates.  • 

The  actual  figures  of  modern  budgets  do  not  indicate 
much  danger  from  the  purely  economic  action  of  the  State. 
Some  exceptional  cases  occur  where  the  zeal  of  politicians 
has  led  them  to  develop  the  system  of  public  works  beyond 
legitimate  limits.  Thus  the  several  States  of  the  American 
Union  at  one  time  engaged  in  a  reckless  policy  of  internal 
improvements  that  culminated  in  the  repudiations  of 
1 840-50  *.  The  plans  of  the  French  Minister,  De  Freycinet, 
for  railway  extension  were  also  arranged  on  too  extensive 
a  scale,  as  their  subsequent  abandonment  proved.  The 
public  works  of  India  have  furnished  a  ground  for  bitter 
controversy  ;  but  the  opponents  of  the  policy  have  not 

1  H.  C.  Adams,  Public  Debts,  317-342. 
H  2 


IOO  PUBLIC   FINANCE.  [BOOK  I. 

made  out  their  case,  though  under  the  special  circumstances 
of  the  country  greater  moderation  might  have  been  advis- 
able1. 

'  §  5.  We  have  kept  one  of  the  most  essential  parts  of 
state  expenditure  for  the  last — that  incurred  for  the  main- 
tenance of  the  central  organs  of  the  State  itself.  No  matter 
what  be  the  form  of  government,  the  head  of  the  State, 
'  the  Sovereign '  in  Adam  Smith's  phraseology,  must  be 
supported.  Round  this  personal  head  are  grouped  the 
various  branches  of  the  executive,  and  in  some  relation  to 
it  the  legislative  body  also  exists.  In  a  so-called  constitu- 
tional or  '  limited  '  monarchy — the  prevalent  European 
form  of  this  century — the  head  of  the  State  may  possess  a 
private  income,  but  is  far  more  likely  to  be  paid  out  of  the 
Civil  List.  The  royal  or  crown  lands  are  generally  absorbed 
in  the  public  domain,  and  in  any  case  they  must  in  strict- 
ness be  regarded  as  a  portion  of  public  property  set  apart 
from  the  general  funds  for  a  specific  public  object.  This 
application  of  public  revenue  is  necessary,  though  it  often 
excites  an  amount  of  popular  irritation  that  might  be  more 
advantageously  exercised  in  other  directions2.  The  head 
of  the  State  is  frequently  called  on  to  discharge  ornamental 
functions  requiring  a  good  deal  of  expenditure,  and  has, 
moreover,  to  hold  a  higher  position  than  the  wealthiest  of 
his  subjects. 

§  6.  A  republican  State  is  partly  relieved  from  this  ex- 
pense ;  its  head,  usually  elected  for  a  short,  term,  receives 
the  salary  of  a  minister  in  monarchical  States.  There  is, 
however,  a  counterbalancing  cost  in  the  expenditure  on  the 
numerous  members  of  the  corporate  sovereign  3.  Nearly 

1  Cp.  Fawcett,  Indian  Finance.     For  a  vigorous  defence  see  Strachey,  The 
Finances  and  Public  Works  of  India  (1869-1881). 

2  For  the  position  of  the  King's  revenues,  infra,  Bk.  ii.  ch.  2.  Cp.  Roscher, 
§§  9,  117  ;  Wagner,  i.  401  sq. 

3  A  comparison  of  the  cost  of  the  English  Monarchy  and  Parliament  with 
that  of  the  United  States  President  and  Congress,  shows  that  the  latter  is  on  the 
whole  more  expensive.     This  curious  circumstance  is  the  consequence  of  the 
non-payment  of  the  members  of  the  English  Houses.  Admirers  of  the  American 


CHAP.  VI.]  CONSTITUTIONAL    EXPENDITURE.  IOI 

all  democratic  societies  approve  of  payment  to  legislators 
in  order  to  reduce  the  chances  against  poor  men  being 
elected.  The  inevitable  result  is  an  increase  in  the  cost  of 
the  legislative  body,  and  when  the  same  principle  is  applied 
to  subordinate  legislatures,  a  further  increase  has  to  be 
faced.  The  belief  that  legislative  efficiency  is  improved 
by  reward  does  not  appear  well-founded  so  far  as  Finance 
is  concerned.  We  must  remember,  too,  that  historical 
conditions,  and  particularly  the  way  in  which  wealth  is 
distributed,  have  considerable  effect  in  determining  the 
wisest  course.  Thus  the  English  colonies  that  possess 
responsible  government  are  perhaps  justified  in  depart- 
ing from  the  English  method  of  unpaid  legislators.  At 
the  same  time,  there  is  an  unquestionable  advantage  in  the 
development  of  public  spirit  produced  by  the  English 
system.  One  point  is  certain,  viz.  that  the  least  satisfactory 
method  of  all  is  the  granting  of  small  payments  which  do 
not  attract  the  best  men,  while  they  discourage  those  who 
would  serve  without  any  salary.  The  danger  of  corruption 
and  jobbing  is  also  brought  to  its  highest  in  the  case  of  ill- 
paid  legislators  who  are  inclined  to  supplement  their  official 
incomes  by  less  honourable 'means. 

The  expenditure  on  diplomatic  agents  and  ambassadors 
may  perhaps  be  best  placed  under  the  present  head.  Such 
outlay  is  hard  to  classify.  It  might  be  plausibly  regarded 
as  incurred  for  the  sake  of  securing  peace,  and  so  be  added 
to  the  cost  of  the  military  and  naval  services.  Or  again,  it 
might  be  regarded  as  expenditure  for  economic  objects,  viz. 
the  promotion  of  trade,  as  the  consular  service  undoubtedly 
is.  But  on  the  whole  the  diplomatic  staff  is  really  repre- 
sentative of  the  sovereign,  and  is  entitled  to  its  present 
position. 

§  7.  In  nearly  every  civilized  country  the  charge  of  in- 
terest on  debt  has  to  be  considered.  We  shall  have  to 


system  would  remark  that  British  peers  and  M.P.'s  obtain  indirect  rewards,  that 
are  still  less  to  the  advantage  of  their  country. 


IO2 


PUBLIC    FINANCE. 


[BOOK  I. 


examine  fully  the  theory  of  public  credit  and  debt,  and 
therefore  need  only  mention  it  here  as  an  item  of  outlay. 

When  dealing  with  the  mechanism  of  the  financial 
system,  we  shall  have  to  distinguish  carefully  between 
gross  and  net  revenue,  the  former  being  the  total  receipts, 
the  latter  the  net  result  deducting  the  cost  of  collection 
and  the  expenses  necessary  for  obtaining  the  required 
resources.  Here  we  have  simply  to  note  these  charges  as 
one  of  the  parts  of  public  expenditure,  and  to  see  how  large 
an  item  they  are.  In  England  the  Customs,  the  Inland 
Revenue,  and  the  Post  Office  are  mainly  earning  depart- 
ments. The  mere  mention  of  these  establishments  will 
suggest  the  remarkable  differences  in  the  relation  of  revenue 
to  cost  of  collecting  or  earning  it.  Savings  in  this  respect 
are  as  important  as  those  made  in  connexion  with  outlay 
on  other  state  functions,  but  any  reduction  of  cost  which 
impairs  the  efficiency  of  the  fiscal  service  is  as  imprudent 
as  over-retrenchment  in  other  directions. 

The  cost  of  collection  or  earning  of  revenue  in  the 
leading  English  Departments  is  as  follows  :— 

TABLE  (ooo's  omitted). 
CUSTOMS.  INLAND  REVENUE.  POST  OFFICE. 


k 

•; 

kj 

1 

Z 

V| 

1 

j! 

vl 

i 

1 

1 

3l 

i 

I 

31 

1 

g 

" 

ll 

1 

* 

^ 

s 

° 

« 

o5 

£ 

£ 

£ 

£ 

£ 

^ 

1875 
1880 
1890 

19,289 

19,327 
28,424 

1,022 

973 
9°5 

5-3 
5- 
4'5 

44,68i 
48,500 
53,768 

1,672 
1,810 
i,749 

s: 

3-2    ' 

6,885 
7,874 

",774 

5,077 

5,212 
8,303 

74' 
65- 
71- 

In  1806  a  gross  revenue  of  £58,255,000  cost  £2,797,000  to  collect  or  4-8  per 
cent.,  while  in  1826  the  charge  for  collecting  £54,840,000  was  £4,030,000, 
i.e.  7.3  per  cent. 

In  France  the  total  expense  of  collection  for  the  last  ten  years  has  averaged 
about  £13,000,000,  but  of  this  amount  £5,000,000  should  be  charged  to  the 
postal  and  telegraphic  service  and  nearly  £3,000,000  to  the  expenses  of  the 
tobacco  monopoly,  leaving  a  balance  of  £5,000,000  for  the  cost  of  collecting 
the  direct  and  indirect  taxes l. 


1  Leroy  Beaulieu,  i.  267  sq. ;  Wagner,  iii.  432-4,  607-10. 


CHAP.  VI.]  CONSTITUTIONAL   EXPENDITURE.  103 

Having  concluded  our  brief  survey  of  the  forms  of  state 
expenditure,  we  have  now  to  summarize  the  results,  as  also 
to  develope  some  points  that  could  not  be  properly  treated 
until  the  several  heads  of  the  public  services  had  been  duly 
noticed.  There  is,  however,  one  topic  that  must  be  first 
discussed,  viz.  the  distribution  of  state  outlay  between  the 
v\ central  and  local  powers. 


CHAPTER    VII. 

CENTRAL  AND  LOCAL  EXPENDITURE. 

§  1.  UP  to  the  present  we  have  taken  no  notice  (except 
incidentally)  of  the  division  of  duties  between  the  central 
and  local  organs  of  the  State.  For  the  object  that  we  had 
in  view,  this  mode  of  treatment  was  quite  legitimate.  In 
order  to  bring  out  the  fact  that  all  expenditure  by  public 
bodies  is  really  one  in  kind,  and  that  any  differences  are 
subordinate  and  secondary,  it  is  advisable  to  set  forth  the 
leading  forms  of  that  expenditure  in  a  general  and  compre- 
hensive manner.  The  principles  that  determine  the  distri- 
bution of  public  functions  between  central  and  local  powers, 
or  even  between  federal  and  state  governments,  though 
highly  important  and  influential  on  financial  policy,  are  yet 
immaterial  when  we  are  considering  the  broad  grouping 
and  effect  of  the  cost  of  maintaining  those  compulsory 
agencies  that  we  place  together  under  the  title  of  '  the 
State,'  and  the  expediency  of  extending  or  contracting 
their  field  of  operations.  It  is,  besides,  impossible  to 
draw  a  precise  and  definite  line  applicable  to  all  or  most 
ountries  between  general  and  local  expenditure.  What  is 
•etained  in  one  country  or  period  in  the  hands  of  the  cen- 
tral authority  is  in  other  places  or  times  delegated  to  sub- 
ordinate bodies  ;  or  to  regard  the  subject  from  a  different 
aspect,  which  is  in  some  cases  more  in  accordance  with 
historical  fact,  the  older  and  smaller  groups  have  reserved 
from  the  encroachments  of  the  State  very  different  amounts 
of  power  in  different  ages  and  nations. 


CHAP.  VII.]        CENTRAL   AND   LOCAL   EXPENDITURE.  105 

Examples  of  this  diversity  in  usage  are  abundant.  The 
transfer  of  the  English  prisons  from  local  to  central 
management  has  been  already  mentioned l.  The  older 
system  of  poor-relief  in  England  was  purely  local.  The 
grea\reform  of  1834,  though  it  did  not  go  the  length  of 
making  the  aid  of  the  indigent  a  national  charge,  yet 
accepted,  and  was  based  on,  the  recommendations  of  the 
Poor  Law  Commission,  in  favour  of  complete  and  efficient 
regulation  of  local  administration  by  a  specially  formed 
central  board.  The  treatment  of  primary  education  affords 
another  example :  in  England  and  Wales  it  is  largely  under 
local  management,  while  in  Ireland  the  national  school 
system  is  strictly  centralized.  The  police  systems  of  the 
United  Kingdom  also  show  like  differences  in  administra- 
tion. 

On  extending  our  view  to  other  nations  we  find  that  this 
absence  of  uniformity  is  general.  The  powers  of  a  Swiss 
Canton  or  an  American  State  are  far  greater  than  those  of 
an  English  County  or  a  French  Department.  Even  limit- 
ing the  comparison  to  countries  with  substantially  similar 
constitutions  there  still  is  much  variety  in  the  actual  division 
of  duties. 

§  2.  Such  remarkable  differences  have  arisen  from  more 
than  a  single  cause,  but  undoubtedly  the  most  powerful 
reason  is  to  be  found  in  the  peculiar  historical  conditions 
under  which  States  have  been  formed  and  developed2.  To 
explain  e.g.  the  diversities  in  the  distribution  of  public 
duties  in  France  and  Germany,  recourse  must  be  had  to 
history.  In  no  other  way  is  a  full  interpretation  possible. 
The  centralized  system  of  French  administration  goes  back 
to  the  Revolution  of  1789  ;  it  is  a  product  of  the  absolute 
monarchy  and  of  the  consequent  impossibility  of  developing 
local  authorities  3.  The  greater  division  of  state  power  in 

1  Supra,  Bk.  i.  ch.  4.  §  4. 

3  '  Es  ist  vor  alien  Dingen  der  Reichthum  historischer  Veranlassungen  und 
historischer  Besonderheiten,  welcher  diese  Verschiedenheiten  erklart.'  Cohn, 
§  115.  Cp.  Thorold  Rogers,  Economic  Interpretation  of  History,  chap.  22. 

3  Tocqueville,  Ancien  Regime,  Livr.  ii.  ch.  2  (Eng.  Trans.  40  sq.). 


106  PUBLIC    FINANCE.  [BOOK  I. 

Germany  is  one  result  of  the  unhappy  conflicts  that  pre- 
vented its  attaining  to  national  unity  till  the  present  century. 
In  order  to  comprehend  it  we  must  know  the  history  of 
the  Holy  Roman  Empire  and  its  many  changes.  Exactly 
similar  is  the  case  of  Switzerland  or  the  United  States  ; 
each  is  the  product  of  special  conditions.  The  nature  of 
American  state  and  local  governments  is  affected  by  the 
circumstances  of  the  colonial  institutions  from  which  they 
have  sprung.  At  all  stages  of  formation  this  influence  is 
powerful.  It  is  due  to  the  particular  events  of  the  time 
that  Italy  at  almost  a  single  step  reached  the  full  unity  of 
France  or  England,  while  Germany  as  yet  retains  so  many 
traces  of  the  process  by  which  it  has  been  formed.  There 
is  nothing  of  rigorous  necessity  in  the  course  of  develop- 
ment ;  circumstances  that  may  be  regarded  as  accidental 
have  had  most  effect  in  deciding  the  result,  and  there 
seems,  consequently,  little  place  for  the  employment  of 
scientific  explanation  in  so  purely  empirical  a  matter. 

Historical  conditions  are,  however,  often  the  result  of 
deeper  forces ;  the  political  destiny  of  a  nation  is  not 
altogether  at  the  mercy  of  events.'  The  physical  features 
of  its  territory,  the  character  and  sentiments  of  its  members, 
go  a  long  way  in  determining  its  constitution.  We  cannot 
doubt  that  the  mountains  of  Switzerland  and  the  enthusiasm 
of  its  citizens  for  independence  have  contributed  towards 
the  great  vitality  of  its  local  institutions,  but  then  it  is  also 
true  that  circumstances  somewhat  analogous  have  not 
hindered  Holland  from  becoming  a  centralized  state. 

§  3.  The  most  complete  recognition  of  the  preponderating 
influence  of  historical  and  physical  agencies  in  determining 
the  actual  division  of  state  duties  between  the  central 
body  and  the  local  ones  ought  not  to  prevent  us  from  en- 
deavouring— as  far  as  possible — to  disentangle  from  the 
mass  of  material  any  ascertainable  general  principles. 
There  seem  to  be — quite  apart  from  national  peculiarities — 
some  tendencies  operative  in  all  societies  which  assign  par- 
ticular duties  to  the  central  agency  and  place  others  under 


CHAP.  VII.]        CENTRAL   AND   LOCAL   EXPENDITURE.  107 

local  supervision.  An  examination  of  the  several  public 
wants  will  we  believe  confirm  this  view,  showing  that  some 
of  them  can  be  best  satisfied  by  local  management,  and 
that  others  should,  in  order  to  attain  the  desired  object,  be 
supplied  through  the  central  organization  of  the  State. 

In  making  this  distribution  by  reference  to  general  prin- 
ciples it  is  necessary  to  take  into  account  the  historical 
influences  that  we  have  previously  noticed.  They  partly 
determine,  not  only  what  are,  but  what  should  be  general 
and  what  should  be  local  tasks.  What  has  been  for  a  long 
time  confided  to  local  administration  ought  not  without 
good  reason  to  be  transferred  to  the  general  government, 
as  on  the  other  hand  where,  from  any  cause,  little  has  been 
left  to  local  action,  the  devolution  of  tasks  by  the  central 
administration  should  be  gradual  and  cautious. 

§  4.  Additional  light  is  thrown  on  the  leading  principles 
and  present  position  of  the  distribution  of  powers  between 
local  and  central  organs  by  consideration  of  the  fact  that 
two  different  tendencies  have  been  in  operation  during  the 
course  of  history.  Political  evolution  is  not  a  direct  move- 
ment towards  a  definite  goal  ;  it  is  rather  a  series  of  efforts 
following  the  line  of  least  resistance  at  any  given  time. 
Early  societies  do  not  exhibit  the  opposition  or  distinction 
between  central  and  local  powers.  All  government  is  local, 
either  in  the  tribal  system  as  found  in,  Germany,  or  in  the 
city  states  of  Greece  and  Italy.  Wai^— and  its  result  con- 
quest— is  the  introducer  of  centralization.  The  smaller 
groups  are  unable  to  withstand  the  successful  military  chief 
and  have  to  submit  to  his  rule.  The  municipal  govern- 
ments of  the  classical  age — for  such  they  were  in  fact — 
passed  at  last  under  the  dominion  of  Rome,  which  gives  us 
the  picture  of  a  vast  administrative  organization  employing 
local  authorities  as  the  instruments  of  its  working.  The 
autonomous  city  was  in  practice  reduced  to  take  commands 
even  as  to  the  smallest  details  from  the  Emperor  and  his 
officials.  Some  place  for  local  co-operation  was  allowed 
under  the  earlier  Empire,  and  up  to  the  last  the  expenditure 


IC)8  PUBLIC    FINANCE.  [BOOK  I. 

of  towns  was  distinct  and  separate  from  that  of  the  Imperial 
government l. 

Mediaeval  society  shows  a  movement  towards  the  revival 
of  local  privileges.  In  all  European  countries  the  cities 
succeeded  in  acquiring  a  large  amount  of  freedom  in  deal- 
ing with  their  own  affairs.  In  some  countries — as  Italy — 
they  almost  reached  independence,  and  in  all  they  were 
enabled  to  apply  their  resources  to  objects  of  local  interest. 
One  of  the  principal  features  of  the  steadily  growing 
consolidation  of  states  in  modern  times  has  been  the  re- 
duction in  power  of  the  various  semi-independent  bodies 
within  the  state  2.  Provincial  liberties  were  curtailed,  and 
particular  immunities,  whether  of  towns,  districts,  or  as- 
sociations, had  to  give  way  to  the  rule  of  uniform  rights 
and  duties.  With  great  varieties  in  the  process  in  different 
countries  the  same  general  result  was  reached,  viz.  the 
absorption  of  all  independent  political  forces  in  the  single 
organ  of  the  State.  This  point  was  sooner  attained  in 
England  than  in  France,  and  in  France  than  in  other 
continental  states,  but,  except  where  a  federal  system  has 
preserved  the  authority  of  one  group  of  bodies,  it  is  now 
accomplished  in  all  civilized  societies. 

The  establishment  of  a  controlling  and  legally  omni- 
potent government,  though  it  marks  an  important  stage  in  / 
political  growth,  is  nevertheless  accompanied  by  some  dis- 
advantages. However  desirable  it  may  be  that  the  powers 
of  a  nation  should  not  be  weakened  by  the  existence  in  its 
midst  of  powerful  bodies  in  a  position  to  frustrate  the 
attempts  of  its  rulers  to  act  with  vigour  and  decision  in  a 
given  way,  and  however  much  society  may  suffer  from  the 
absence  of  political  cohesion,  it  is  not  conducive  to  the 
interests  of  the  nation  to  concentrate  all  administrative  V 
power  in  a  single  centre.  The  gains  from  centralization 
may  be  great,  but  to  obviate  the  evils  that  accompany  it 

1  For  the  division  of  expenditure  between  the  state  treasuries  and  the  towns, 
see  Humbert,  Essai  sur  les  Finances,  i.  208,  389-401,  411-417. 

2  Roscher,  §  156 ;  also  his  Ackerbati,  §§  5  sq. 


CHAP.  VII.]        CENTRAL   AND    LOCAL   EXPENDITURE.  ICK) 

a  wise  decentralization  is  also  requisite.  Having  secured 
political  unity,  it  becomes  the  task  of  the  statesman  to  so 
distribute  the  powers  of  government  as  to  obtain  the  best 
Apolitical  and  financial  results.  The  earlier  historical  move- 
ment that  has  led  to  combination  needs  to  be  supplemented 
and  corrected  by  the  rational  process  of  division  of  duties. 
All  modern  societies  have  to  see  whether  their  present 
institutions  strike  the  mean  in  this  respect,  and  if  not,  how 
\they  can  best  attain  it. 

§  5.  The  relations  of  the  administrative  organs  become 
more  complex  as  States  increase  in  size.  A  small  society 
has  no  need  of  intermediate  political  forms  between  the 
lowest  unit  and  the  State,  but  in  countries  with  the  area 
and  population  of  the  great  European  powers  or  the  United 
States  something  more  is  wanting.  Between  the  *  parish'  or 
'  township  ' — the  'primitive  cell '  of  the  political  organism  — 
and  the  central  government  there  are  found  one  or  more 
bodies  essentially  subordinate  to  the  latter,  but  of  greater 
range  and  larger  resources  than  the  former.  Thus  France 
has  the  canton,  arondissement,  and  department ;  Prussia, 
the  district,  the  circle,  and  the  province  ;  England,  the  union 
and  the  county;  the  United  States,  the  county  and  the 
state  or  '  commonwealth  ' ;  and  in  each  nation  a  different 
class  of  duties  is  assigned  in  proportion  to  the  size  and 
importance  of  the  particular  body. 

The  complexities  of  local  government  and  Finance  have 
in  some  countries  been  increased  by  the  irregular  and  almost 
haphazard  method  of  expansion  adopted.  Instead  of  fol- 
lowing a  definite  and  orderly  plan,  each  special  need  has 
been  met  by  a  special  creation.  This  natural  but  unfortu- 
nate method  of  procedure  is  characteristic  of  English  and 
in  some  degree  of  American  legislation.  Where  a  new 
local  duty  has  been  marked  out,  a  new  area  with  a  separate 
board  has  been  formed,  ideas  of  uniformity  or  co-ordination 
being  almost  ostentatiously  disregarded.  The  outcome  in 
England  has  been,  according  to  Mr.  Goschen's  often-quoted 
phrase,  *  a  chaos  as  regards  authorities,  a  chaos  as  regards 


110  PUBLIC    FINANCE.  [BOOK  I. 

rates,  and  a  worse  chaos  than  all  as  regards  areas  V  Some- 
thing similar  is  the  case  in  a  few  American  States.  '  In 
many  of  our  commonwealths,'  says  Professor  Seligman, 
'  there  are  separate  local  taxes  for  almost  every  purpose 
of  local  expenditure.  In  New  Jersey,  e.  g.  we  find  no  less 
than  forty  such  separate  taxes  2.'  The  reason  for  this  con- 
fusion is  only  discoverable  by  considering  the  usual  concep- 
tion of  local  governing  bodies ;  they  were  regarded  rather 
as  associations  for  a  particular  end  than  as  delegations  of 
the  public  power,  and  it  is  in  fact  true  that  the  smaller 
subdivisions  do  approximate  more  closely  to  private  groups 
in  proportion  as  their  sphere  of  action  is  reduced.  The 
generally  unsystematic  character  of  English  legislation  also 
favoured  this  extreme  multiplication  of  local  functions 
arranged  on  no  definite  plan. 

Political  organization  developed  on  perfectly  logical  prin- 
ciples would  offer  a  decided  contrast  to  the  multiplicity 
of  arrangements  just  described.  It  would  be  symmetrical 
and  convenient  to  a  degree  that  no  country — not  even 
France — can  lay  claim  to  at  present.  In  actual  political 
life,  perfectly-adjusted  plans  of  the  kind  are  inapplicable. 
Constructive  legislation  is  hindered  by  the  nature  of  the 
materials  that  are  at  hand.  The  correct  and  well-fitted 
plan  will  not  work  by  reason  first  of  all  of  the  varying 
circumstances  of  different  districts.  Rural  areas  are  suited 
for  a  simple  kind  of  local  government  that  would  utterly 
fail  if  applied  to  towns  or  cities.  The  latter  require  a  more 
elaborate  and  careful  system  ;  their  expenditure  is  sure  to 
be  much  greater,  and  even  if  part  of  it  be  what  is  called 
'  productive '  and  likely  to  afford  counterbalancing  receipts, 
there  is  still  a  greater  amount  of  energy  and  toil  required 
in  working  their  Finances,  and  special  provisions  are  needed 
to  prevent  abuses  :i.  In  many  countries,  however,  backward 

1  Local  Taxation,  190. 

2  Finance  Statistics  of  the  American  Commomvealths,  108. 

3  Rules  limiting  expenditure,  and  so  raising  a  barrier  against  abuses,  are  in 
such  cases  very  useful,  and  seem  to  be  growing  in  favour  both  in  the  United 
Kingdom  and  the  United  States. 


CHAP.  VII.]        CENTRAL  AND    LOCAL    EXPENDITURE.  Ill 

agricultural  districts  are  often  transformed  in  a  few  years 
into  seats  of  manufactures  and  commerce,  making  altera- 
tions in  the  form  of  local  government  essential 1.  Some 
particular  interests  are  also  so  important  as  to  need  special 
treatment.  The  management  of  harbours,  river  navigation, 
and  drainage,  or  of  great  public  works  created  at  the  cost 
of  the  State  may  have  to  be  placed  under  bodies  formed 
to  represent  the  interests  chiefly  concerned,  and  they  must 
be  kept  apart  from  the  general  system,  and  so  far  mar  its 
completeness  2. 

The  necessity  for  attending  to  geographical  boundaries 
tends  to  prevent  even  an  approximation  to  divisions  with 
equal  areas  or  population,  and  special  local  habits  and  cus- 
toms act  with  the  same  effect.  But  the  greatest  check  in 
this  direction  arises  from  constitutional  restraints.  Perfectly 
unified  governments  such  as  those  of  France  and  England  are 
seemingly  free  from  this  defect.  There  is  nothing  in  English 
law  to  prevent  Parliament  from  abolishing  the  divisions  into 
counties  and  parishes  and  substituting  a  new  one  in  its 
place.  The  whole  machinery  of  municipal  administration 
might  at  the  same  time  be  handed  over  to  a  central  board 
with  an  official  staff3.  The  federal  countries — Germany, 
Switzerland,  the  United  States — are  differently  situated. 
The  power  of  constitutional  legislation  is  distributed  in  a 
more  complex  manner,  with  the  intention  and  result  of 
checking  its  frequent  exercise.  Such  '  rigid  '  constitutions 
— as  they  have  been  happily  called — give  a  permanence  to 
particular  local  divisions  that  prevents  the  powers  of  admi- 
nistration being  divided  in  accordance  with  theoretical  con- 
ceptions. A  Swiss  Canton  or  American  State  claims  a 

1  The  number  of  new  towns  that  have  sprung  up  in  England,  Germany,  and 
above  all  in  America,  during  the  last  fifty  years,  makes  this  point  important. 

2  The  Harbour  and  Dock  Boards  very  common  in  England,  elected  under 
special  franchises  and  with  powers  to  levy  tolls,  are  a  good  example. 

3  Every  one  knows  that  Parliament  will  do  neither  of  the  things  mentioned  in 
the  text,  but  the  limitations  on  its  action  are  moral,  not  legal,  and  consist  in  the 
fear  of  exciting  opposition  on  the  part  of  the  people,  and  in  its  own  sentiments, 
i.  e.  they  are  external  and  internal.  Cp.  Dicey,  Law  of  the  Const  ittttion,  Lect.  ii. 


112  PUBLIC   FINANCE.  [BOOK  I. 

legal  position  essentially  different  from  that  of  a  County  or 
Department.  It  is  prior  in  order  of  time  to  the  central 
government,  towards  whose  creation  it  may  be  said  to  have 
contributed,  and  it  is  entitled  to  object  to  measures  affect- 
ing its  existence1.  Whatever  be  the  reasons  in  favour  of 
this  system — and  we  need  not  undervalue  them — it  is  a 
fatal  barrier  to  orderly  and  proportionate  distribution  of 
functions.  Delaware  and  Rhode  Island,  insignificant  both 
in  population  and  area,  hold  the  same  place  as  the  great 
States  of  New  York,  Pennsylvania,  and  Texas ;  Berne, 
with  more  than  half  a  million  of  people,  is  only  equal  to 
Uri,  with  less  than  one-twentieth  of  that  number. 

Difficulties  of  the  kind  just  noticed  are  not  in  reality  so 
serious  as  they  at  first  appear.  To  begin  with,  the  intract- 
ableness  is  found  in  one  only  of  the  minor  groups  or  sub- 
divisions ;  the  others  can  be  easily  adjusted.  Congress 
cannot  indeed  re-distribute  the  areas  of  New  York  and 
New  Jersey  without  the  consent  of  both  of  those  States, 
but  either  State  can  re-arrange  its  counties  and  municipali- 
ties as  it  pleases  ;  the  important  cities  of  New  York  and 
Brooklyn  are  absolutely  dependent  on  the  legislature  of 
their  State  for  corporate  powers.  Therefore  within  each 
State  a  re-organization  of  local  government  is  possible. 
Again,  by  taking  extreme  cases  an  unfair  impression  is 
produced.  The  average  State  or  Canton  (say  Wisconsin  or 
Freiburg)  is  a  convenient  body  to  interpose  between  the 
national  government  and  the  smaller  local  groups.  There 
is  besides  a  tendency  towards  adjustment  between  the  habits 
of  a  people  and  its  indigenous  institutions.  The  Americans 
and  Swiss  have  by  usage  become  fitted  for  their  particular 
systems,  which  therefore  work  with  greater  ease.  The 
distribution  of  the  several  German  States  is  more  irregular, 


1  '  No  new  State  shall  be  formed  or  erected  within  the  jurisdiction  of  any 
other  State,  nor  any  State  be  formed  by  the  junction  of  two  or  more  States  or 
parts  of  States,  without  the  consent  of  the  legislatures  of  the  States  concerned 
as  well  as  of  the  Congress.'  Constitution  of  U.  S.,  Art.  iv.  section  3.  Cp.  Art. 
78  of  the  German  Constitution  for  an  analogous  provision. 


CHAP.  VII.]       CENTRAL   AND    LOCAL   EXPENDITURE.  113 

and  illustrates,  as  noticed  before,  the  powerful  influence  of 
historical  conditions.  The  principal  anomaly  is  due  to  the 
preponderance  of  Prussia  compared  with  the  very  small 
States  that  form  part  of  the  empire.  The  internal  local 
government  of  Prussia  is  however  based  on  a  well-propor- 
tioned system l. 

§  6.  Applying  our  results  to  the  financial  question  of 
expenditure  and  its  proper  division,  we  commence  with  the 
central  government.  Its  claims  to  disburse  the  larger  part 
of  the  total  public  revenue  are  unquestionably  strong.  It 
is  the  representative  of  the  nation.  Other  bodies  exist 
under  it  and  to  relieve  it  of  undue  toil,  but  'the  State '  in  the 
popular  sense  of  the  term  isprimd  facie  the  agent  in  charge 
of  all  public  duties.  It  is  at  once  clear  that  all  general 
interests  ought  to  belong  to  its  province.  What  concerns  the 
whole  community  may  indeed  for  other  valid  reasons  be 
delegated  to  localities,  but  the  fact  that  a  public  function 
concerns  all  is  a  weighty  reason  for  intrusting  it  to  the 
central  government.  No  smaller  body  can  take  the  same 
ground,  no  matter  how  liberal  its  constitution  may  be. 
Even  an  absolute  ruler  is  in  most  cases  more  likely  to 
regard  the  welfare  of  all  than  the  representative  assembly 
of  one  part  of  the  nation's  territory,  while  the  highest  secu- 
rity for  due  attention  is  obtained  by  the  representation  of 
all  districts  in  a  national  legislature.  This  attitude  of  the 
central  government  is  partly  the  consequence  of  the  wider 
view  that  it  is  almost  compelled  to  take,  but  it  is  also  partly 
due  to  the  higher  intelligence  and  skill  that  it  has  at  its 
disposal.  For  tasks  in  which  these  elements  are  of  im- 
portance the  superiority  of  the  central  administration  is 
generally  apparent.  A  third  circumstance  in  many  cases 
favours  the  centralization  of  certain  classes  of  state  duties 
— those  namely  in  which  unity  and  co-ordination  are  re- 
quired. Though  division  of  labour  is  beneficial,  combina- 
tion of  labour  is  no  less  so,  and  public  duties  that  need 

1  See  the  instructive  articles  on  '  Local  Government  in  Prussia,'  by  F.  Good- 
now,  Pol.  Science  Quarterly,  iv.  648-666,  and  v.  124-158. 

I 


114  PUBLIC    FINANCE.  [BOOK  I. 

combination  will  naturally  be  placed  under  a  single  control. 
It  would  be  too  much  to  assert  that  these  conditions  have 
completely  determined  the  actual  sphere  of  the  national 
government  in  modern  countries  ;  it  would  be  a  grosser 
exaggeration  to  say  that  they  have  done  so  consciously. 
There  is  however  much  truth  in  the  doctrine  that  the 
actual  forces  which  they  describe  have  generally  had  a 
powerful  effect. 

The  sphere  of  local  agencies  in  directing  expenditure 
can  be  indicated  by  reference  to  conditions  strongly  con- 
trasting with  those  just  described,  that  make  it  expedient 
to  call  into  play  the  administrative  energies  of  the  smaller 
territorial  bodies. 

As  the  central  power  guards  the  general  interest,  so  do 
the  representatives  of  localities  best  attend  to  their  par- 
ticular interests.  *  That  people  manage  their  own  affairs 
best '  is  not  universally  true,  but  it  has  sufficient  truth  to 
justify  the  intrusting  of  local  matters  to  the  several 
localities  affected.  A  second  case  in  which  local  is  superior 
to  central  administration  occurs  wherever  minute  super- 
vision is  required.  Central  authorities  with  superior  skill 
and  intelligence  may  often  fail  through  the  difficulty  of 
regulating  from  a  distance  operations  that  need  unfailing 
attention  and  watchfulness.  It  is  to  this  circumstance  that 
we  must  attribute  the  almost  universal  devolution  of  the 
smaller  parts  of  economic  administration,  as  it  is  to  it  that 
we  probably  owe  the  origin  of  the  attempts  at  decentrali- 
zation en  the  part  of  the  general  government.  Finally,  it 
is  expedient  to  place  the  charge  of  public  duties  in  the 
hands  of  the  smaller  bodies  when  diversity  rather  than  unity 
is  needed.  Some  of  the  forms  of  state  action  are  not 
suitable  for  being  conducted  on  a  uniform  pattern.  Special 
conditions  and  habits  have  to  be  taken  into  account,  so 
that  the  very  tendency  to  adopt  different  methods  becomes 
a  benefit  instead  of  an  injury.  In  fact,  as  the  result  it  ap- 
pears that  if  attention  to  the  general  welfare,  the  command 
of  higher  intell;gence  and  skill,  and  the  power  of  unity  in 


CHAP.  VII.]       CENTRAL   AND    LOCAL   EXPENDITURE.  115 

action  are  advantages  possessed  by  the  central  govern- 
ment, regard  to  local  interests,  attention  to  details,  and 
possibilities  of  judicious  variety  in  practice  will  be  best 
secured  by  local  management. 

The  same  conditions  help  to  determine  the  functions  of 
the  intermediate  public  organs.  A  county  administration 
has  the  same  advantages  over  a  parochial  one  that  the 
national  one  has  over  it,  and  it  is  inferior  in  the  same 
respects.  An  American  State  holds  the  same  position  in 
respect  to  the  smaller  local  divisions.  Its  sphere  of  action 
has  to  be  limited  in  both  directions  by  reference  to  the 
general  principles  already  noticed.  When  we  come  to  such 
important  divisions  as  the  State  of  New  York  or  the  newly- 
formed  administrative  County  of  London,  the  restrictions 
on  their  functions  are  dictated  rather  by  considerations  of 
national  unity  than  by  defects  of  organization.  The  position 
of  the  larger  German  States,  Baden  and  Saxony,  and  still 
more  Bavaria  and  Wiirtemberg,  in  the  distribution  of  power 
can  hardly  be  settled  by  reference  to  principle.  Their  claims 
to  national  independence  are  strong,  but  are  tending  to  be 
reduced. 

§  7.  Taking  up  in  order  the  different  forms  of  public 
expenditure,  we  find  it  easy  to  understand  the  reasons  for 
making  the  military  and  naval  forces  a  national  charge. 
Security  is  the  greatest  general  interest  of  a  society : 
the  appliances  and  organization  necessary  for  successful 
defence  tax  severely  the  highest  powers  of  human  intelli- 
gence ;  and  unity  of  management  is  of  great  advantage  in 
warfare.  Consequently  the  cost  of  war  and  preparation 
for  it  always  comes  from  the  national  budget.  Germany 
and  Switzerland  still  preserve  some  traces  of  the  older 
independence  of  their  component  parts,  but  the  German 
forces  are  in  fact  completely  under  imperial  control  and  their 
cost  is  defrayed  from  imperial  funds  l.  One  of  the  most 

1  Bavaria  and  Wiirtemberg  are  the  only  States  that  keep  an  appearance  of 
independence,  but  in  war  the  allegiance  of  the  Bavarian  troops  is  due  to  the 
Emperor,  and  her  contribution  towards  expenses  is  compulsory.  In  Switzerland, 

I  2 


Il6  PUBLIC   FINANCE.  [BOOK  I. 

decisive  marks  of  union  between  hitherto  independent 
States  is  the  formation  of  a  common  army. 

The  cost  of  Justice  also  seems  most  fitly  to  belong  to 
the  general  expenditure.  It  figures  in  all  national  budgets, 
but  some  of  the  charge  may  be  thrown  on  localities.  In  a 
Federal  State  the  subordinate  courts  are  usually  reserved  by 
the  separate  units,  but  the  Judiciary  of  the  Union  becomes 
a  general  charge.  The  reason  of  this  division  is  plainly 
historical,  and  as  there  is  no  pressing  necessity  for  com- 
plete unity  in  the  judicial  organization  it  is  allowed  to 
continue.  The  importance  of  distinguishing  between 
federal  and  state  law  is  a  further  ground  for  separating 
the  central  and  local  courts.  Uniformity  in  law  and  in  its 
administration  is  such  a  benefit  to  a  society  that,  unless 
under  special  circumstances,  it  is  advisable  to  place  it  in 
the  hands  of  the  national  government.  Efficiency,  too,  is 
increased  by  removing  the  judges  from  the  distracting 
influence  of  local  feeling  that  is  sure  to  affect  them  when 
they  are  appointed  and  paid  by  the  district  in  which 
they  act. 

,  yyv  Police,  and  the  treatment  of  criminals,  cannot  be  definitely 
assigned  to  either  department.  On  the  one  hand  it  is  cer- 
tainly advantageous  to  have  these  matters  arranged  on 
general  principles.  All  members  of  the  nation  are  interested 
in  the  preservation  of  internal  order  in  every  part  of  their 
country.  No  district  should  be  allowed  to  so  relax  its 
prison  administration  as  to  offer  inducements  to  a  criminal 
class  to  congregate  within  it 1 ;  but  on  the  other  hand,  the 
benefits  in  closer  supervision  and  greater  economy  when 

though  part  of  the  forces  are  cantonal,  the  first  claim  on  their  services  belongs 
to  the  Federal  Government,  and  the  principal  outlay  is  by  it.  In  1876  it  was 
about  six-sevenths  of  the  whole. 

1  '  It  would  not  be  a  matter  personally  indifferent  to  the  rest  of  the  country 
if  any  part  of  it  became  a  nest  of  robbers  or  a  focus  of  demoralization,  owing 
to  the  maladministration  of  its  police,  or  if,  through  the  bad  regulations  of  its 
gaol,  the  punishment  which  the  courts  of  justice  intended  to  inflict  on  the  criminals 
confined  therein  (who  might  have  come  from  or  committed  their  offences  in  any 
other  district)  might  be  doubled  in  intensity  or  lowered  to  practical  immunity.' 
J.  S.  Mill,  Representative  Government,  116. 


CHAP.  VII.]        CENTRAL  AND   LOCAL    EXPENDITURE.  117 

the  duty  is  intrusted  to  localities  are  a  considerable  set  off ; 
besides,  the  principal  interest  of  good  order  is  found  in  the 
case  of  those  resident  in  the  district.  A  practical  solution 
is  generally  discovered  in  a  division  of  the  duties,  combined 
with  regulations  as  to  the  distribution  of  the  burdens 
imposed. 

Administrative  duties  have  also  been  divided,  and,  though^-^ 
in  most  countries  no  attempt  has  been  made  to  settle  the 
partition  on  intelligible  principles,  usually  in  conformity 
to  the  guiding  conditions  indicated  above.  Where  wide, 
general  interests,  requiring  a  high  degree  of  skill  from 
those  who  control  them,  are  involved,  the  central  govern- 
ment has  been  the  acting  body.  In  smaller  and  more 
detailed  matters  the  local  governments  have  undertaken 
the  task. 

The  relief  of  distress  is  primarily  a  local  duty.  During  - 
the  development  of  the  English  Poor  Law,  previous  to  1834, 
the  whole  system  of  management  was  left  to  the  small  unit 
of  the  parish,  and  though  this  arrangement  led  to  much 
irregularity,  it  afforded  examples  of  the  best  method  of  ad- 
ministration, which  were  utilized  by  the  reformed  system l. 
Local  administration  and  charge  does,  however,  give  rise 
to  difficulties  ;  in  particular  the  question  of  the  domicile  or 
'  settlement '  of  those  relieved  becomes  a  constant  subject 
of  disputes.  '  The  birthplace  and  dwelling  of  the  foremost 
peer,'  says  Mr.  McNeil-Caird,  'the  birthplace  and  dwelling 
of  Newton,  Shakespeare,  Milton,  or  Burns  were  never 
investigated  with  half  the  eagerness,  or  a  tenth  of  the 
expense,  that  is  freely  spent  as  to  the  birth  and  residence 
of  a  pauper'2.  -The  injustices  attending  the  distribution 
of  the  cost  are  always  perplexing,  but  local  direction  and 
management  under  central  regulation  presents,  on  the  whole, 
the  least  objectionable  method. 

In  dealing  with  education   it  is   at   once  obvious  that 

1  See  Report  of  the  Commission  of  1832,  232-260. 

'*  Local  Government  and  Taxation,  Cobden  Club  Essays  (3rd  Series,  1875), 
M3- 


Il8  PUBLIC    FINANCE.  [BOOK  I. 

elementary  teaching  has  a  closer  relation  to  separate 
localities,  resembling,  in  this  respect,  poor-relief.  Particular 
circumstances  so  far  affect  it  that  there  is  reason  for  making- 
it,  at  least  in  part,  a  local  charge  ;  but  it  is  also  a  general 
interest  affecting  the  well-being  of  the  whole  society  and 
requiring  for  its  proper  working  a  great  amount  of  trained 
intelligence,  which  can  be  best  supplied  by  the  central 
government.  The  higher  grades  of  education  do  not  admit 
of  the  same  degree  of  localization.  Universities  in  especial 
bear  a  distinctly  national  character,  and  are  therefore,  so  far 
as  they  receive  public  aid,  rightly  a  national  charge.  Other 
appliances  for  instruction  and  the  promotion  of  culture  are 
provided  both  from  general  and  local  sources,  though  it  is 
hard  to  determine  what  should  be  the  exact  position  of  each 
in  the  matter. 

Wherever  the  support  of  religion  is  a  public  function  it 
is  met  from  the  national  budget  or  at  least  by  national 
endowments,  the  cases  where  local  bodies  pay  for  religious 
services  being  simply  compensation  for  work  done,  as  in 
the  case  of  prison  chaplains,  &c. 

The  principle  of  general  or  particular  interest  explains 
the  division  of  the  economic  duties  of  the  State.  What 
affects  the  whole  society  is  done  by  the  central  govern- 
ment ;  what  is  specially  needed  by  a  locality  or  minor 
division  is  usually  done  by  it.  Here,  however,  there  are 
exceptions.  Works  too  extensive  for  the  resources  of  a 
district  are  undertaken  by  the  central  administration,  or 
aid  is  given  to  the  subordinate  authorities  who  direct  and 
manage  them.  In  this  department  of  expenditure  the 
smaller  bodies  are  more  likely  to  become  embarrassed 
than  is  the  central  state  authority.  Their  available  funds 
are  not  of  such  vast  extent,  and  change  more  speedily  in 
amount  owing  to  their  limited  area.  Local  administration, 
besides,  in  reference  to  public  works  is  more  liable  to  suffer 
from  the  private  interests  that  affect  all  public  economy l. 
The  modern  credit  system,  moreover,  affords  facilities  for 
1  Bk.  i.  ch.  i.  §  2. 


CHAP.  VII.]        CENTRAL   AND    LOCAL   EXPENDITURE.  1 19 

expenditure  based  on  a  pledge  of  the  property  of  the  district 
that  will  not  be  felt  at  once,  but  will  prove  a  continuous 
charge.  It  is  in  respect  of  this  so-called  '  reproductive ' 
outlay  that  the  difficulties  of  local  finance  at  present  are 
most  serious. 

Finally,  with  regard  to  what  we  have  called  constitutional 
expenditure,  the  boundary  line  is  plain  and  simple.  Each 
part  generally  pays  for  its  own  outlay.  Members  of  the 
central  executive  and  legislature  are  paid  from  the  central 
budget.  The  officials  and  subordinate  legislators  of  States, 
cantons,  or  municipalities  are  paid  from  the  budget  that 
they  are  connected  with.  As  an  exception,  the  charge  of 
all  elections  is  sometimes  a  local  one,  but  it  is  so  on  the 
ground  that  it  is  really  a  local  interest. 

§  8.  It  thus  appears  that  on  a  broad  view  and  with  full 
allowance  for  the  influence  of  previous  history  and  special 
circumstances  in  each  case,  there  is  a  tendency  to  dis- 
tribute functions,  and  therefore  expenditure,  in  accordance 
with  the  principles  that  we  have  seen  in  operation.  Some 
additional  reasons  for  particular  forms  of  distribution  may 
be  noted  here  :  they  are  really  expansions  of  those  already 
pointed  out. 

First,  particular  duties  are  often  given  to,  or  withheld 
from,  local  bodies  on  the  ground  that  they  are  well  suited, 
or  unable,  as  the  case  may  be,  to  bring  the  cost  of  the 
service  home  to  those  who  benefit  by  it.  This,  however,  is 
merely  an  application  of  the  principle  that  particular  in- 
terests belong  to  those  concerned  in  them  and  a  further 
reason  for  that  policy.  The  division  of  control  over  outlay 
so  as  to  secure  justice  in  the  apportionment  of  the  burden 
can  be  realized  in  another  way,  viz.  by  a  readjustment  of 
receipts  between  the  central  and  local  governments.  A 
further  ground  for  limiting  local  duties  is  sometimes  found 
in  the  existing  division  of  general  and  local  taxation. 
When,  as  in  some  countries,  local  revenues  are  rigidly 
restricted  in  amount,  it  is  evidently  impossible  to  place 
duties  needing  much  extra  cost  on  them.  Here,  too,  the 


120  PUBLIC   FINANCE.  [BOOK  I. 

true  explanation  is  found  in  the  narrowness  of  the  local 
interest  that  has  led  to  the  limitation  on  its  taxing  power, 
and  it  can  be  remedied  either  by  removing  the  restraint,  or, 
as  in  recent  English  legislation,  by  a  transfer  of  part  of  the 
general  revenue.  By  dexterous  use  of  the  latter  method  it 
is  possible  to  combine  the  great  aim  in  expenditure — the 
maximum  return  for  outlay,  with  that  in  the  collection  of 
revenue — a  just  distribution  of  burdens. 

§  9.  Some  further  characteristics  of  local  Finance  in  rela- 
tion to  expenditure  require  attention.  We  have  seen  the 
classes  of  duties  that  local  bodies  deal  with,  and  that  they 
are  mainly  of  an  economical  character,  at  least  in  so  far 
that  advantage  and  cost  can  be  somewhat  definitely  mea- 
sured. This  feature  suggests,  as  we  saw,  a  comparison 
with  private  economic  associations  ;  and  though  the  resem- 
blance is  closest  in  the  industrial  domain  l,  it  also  appears 
with  regard  to  expenditure.  There  is,  however,  one  essen- 
tial difference.  The  private  company  is  formed  on  a  volun- 
tary basis.  No  one  is  compelled  to  enter  it  against  his  will ; 
a  local  governmental  body  has  compulsory  powers,  and 
is  therefore  more  particularly  in  need  of  being  kept  within 
bounds  in  its  action,  and  of  being  compelled  to  act  when 
circumstances  require  it.  Some  of  the  duties  in  its  cnarge 
are  general  state  tasks,  delegated  for  motives  of  convenience. 
These  it  cannot  be  allowed  to  neglect.  Otherwise  pro- 
visions for  poor-relief,  education,  or  police  of  the  highest 
value  might  be  rendered  utterly  useless  by  hostility  on  the 
part  of  the  local  administrators.  In  other  cases,  where  the 
task  is  purely  of  local  interest,  as  e.  g.  water-supply,  a 
minority  of  the  inhabitants  may  suffer  from  the  ignorance 
or  carelessness  of  the  majority  when  also  there  is  ground 
for  interference  by  the  central  power.  Such  cases  make 
supervision  and  regulation  of  the  various  divisions  a  necessity 
of  good  government.  To  insist  on  the  discharge  of  cer- 
tain functions,  to  prevent  an  undue  extension  of  others, 
and,  finally,  to  protect  the  interests  of  individuals  against 

1  As  in  the  case  of  municipal  gas  or  water-works  ;  Bk.  ii.  ch  3. 


CHAP.  VII.]        CENTRAL  AND   LOCAL   EXPENDITURE. 


121 


encroachnients._b^-iocal  authorities,  becomes  an  important 
state  work1.  An  organization  connecting  the  local  and 
"central  bodies  is  needed,  and  has  been  developed  in  most 
countries.  The  English  Poor  Law  Board — becoming  later 
on  the  Local  Government  Board — is  a  good  example.  So 
are  the  many  Commissions  in  the  American  States ;  while 
similar  results  are  attained  in  another  way  by  the  bureau- 
cratic systems  of  France,  Germany,  and  Italy.  The  need 
of  securing  due  discharge  of  duties  imposed,  avoidance  of 
expenses  in  directions  not  allowed  by  law,  and  moderation 
in  the  exercise  of  expenditure,  even  on  lawful  objects,  has 
brought  about  a  system  that  shows  in  the  clearest  way  how 
all  expenditure,  local  as  well  as  general,  is  really  one,  and  has 
to  be  combined  in  order  to  judge  correctly  of  the  pressure 
of  the  State  and  its  organization  on  the  national  resources. 
The  value  of  this  conception  of  the  unity  of  state  services 
in  helping  to  form  a  true  idea  of  public  expenditure,  will  be 
better  realized  by  reference  to  the  following  table  : 

TABLE  (ooo's  omitted). 
EXPENDITURE. 


United  Kingdom  (1887-8) 
France  (1886)  
Italy  (1885)      
United  States  (1886-7)  2... 

Central 

Local. 

Total. 

Percentage  of  total 
expenditure  by 
Local  Government. 

£ 

87,423 
131,740 
69,220 
53,600 

£ 
67,451 
53,400 
27,300 

2  1,  460  3 

£ 

154,874 
185,140 
96,520 
75,060 

43- 
28' 
28- 
28-6 

1  Roscher  classifies  duties  of  local  bodies  as  (a)  State,  (ff)  compulsory  local 
and  (c)  optional  local,  §  157.     Cp.  Wagner,  i.  96  sq. 

2  Some  of  the  State  returns  are  for  1886,  others  for  1887. 

3  "State"  expenditure  only  has  been  given  owing  to  the  difficulty  of  obtaining 
returns  of  municipal  outlay,  but  it  is  beyond  doubt  that  the  inclusion, of  county 
and  city  expenditure  would  more  than  double  (probably  treble)  the  sum  given 
in  the  table.     Thus   the  expenditure  of  the  five  cities— Baltimore,  Boston, 
Chicago,  New  York,  Philadelphia — for  1887  was  in  round  figures  £24,000,000. 
The  total  local  (i.e.  State,  county,  and  municipal)  expenditure  for  1880  has 
been  estimated  at  £62,550,000.      Cp.   Ely,  Taxation,  453,  478 ;    Seligman, 
Finance  Statistics,  108. 


122  PUBLIC    FINANCE.  [BOOK  I. 

§  10.  In  some  discussions  of  Finance  two  other  kinds  of 
combined  expenditure  have  been  included  l.  They  are, 
first,  the  Finance  of  '  State  confederations '  (Staatenbiinde], 
and  second,  the  Finance  of  colonies.  Neither  of  these  seem 
entitled  to  a  place.  There  is  a  clear^distinction  between  a 
Federal  State  and  a  confederated  group  of  States.  The 
former  is  a  unity,  and  one  of  its  points  of  unity  is  financial ; 
the  latter  is  easily  dissolved  into  its  component  parts.  The 
resources  of  a  confederacy  are  always  derivative,  and  come 
from  the  separate  units.  A  comparison  between  the  old 
German  Bund  (1815-1866)  and  the  present  German  Empire 
brings  out  the  difference  in  Finance,  as  in  other  points,  with 
the  utmost  clearness. 

The  same  reasoning  applies  to  colonial  Finance.  It  is 
perfectly  correct  to  combine  the  Imperial  and  local  Finance 
of  the  United  Kingdom  into  a  single  whole.  To  add 
together  British,  Canadian,  and  Indian  Finance  would 
be  a  transparent  error.  The  conditions  are  different,  and 
the  interests  affected  are  independent.  Even  the  Finance 
of  different  colonies,  e.  g.  Victoria  and  New  South  Wales, 
could  not  be  amalgamated.  The  conditions  of  unity  do 
not  exist.  The  whole  conception  of  a  financial  system  rests 
on  the  oneness  of  the  State,  and  any  departure  from  that 
guiding  rule  is  sure  to  lead  to  confusion. 

1  As  by  Stein,  i.  64,  76-81.  Wagner,  i.  79,  includes  the  first,  but  not  the 
second  head  (Colonial  Finance). 


CHAPTER    VIII. 

SOME  GENERAL  QUESTIONS  OF  EXPENDITURE. 

§  1.  THE  outlay  of  the  State,  like  that  of  the  individual, 
may  be  distinguished  into  normal  or  '  ordinary,'  and  ab- 
normal or  'extraordinary.'  These  terms  almost  explain 
themselves,  but  may  be  thus  contrasted.  Normal  ex- 
penditure is  that  which  recurs  at  stated  periods  and  in  a 
regular  manner ;  it  is  accordingly  capable  of  being  esti- 
mated and  provided  for.  Extraordinary  expenditure  has  to 
be  made  at  indefinite  times  and  for  uncertain  amounts,  and 
it  cannot  be  reckoned  for  with  any  approach  to  accuracy. 
The  distinction  is  not  always  applied  in  the  same  way1,  and 
indeed  the  boundary  line  is  not  to  be  quite  sharply  drawn. 
Most  heads  of  outlay  vary  from  time  to  time,  and  any  in- 
crease may  so  far  be  regarded  as  extraordinary,  the 
'ordinary'  charges  being  those  that,  like  the  English  Civil 
List,  are  fixed  for  a  long  term.  In  practice,  however,  very 
close  estimates  can  be  made  of  probable  expenditure,  small 
increases  in  some  directions  being  compensated  by  savings 
in  others2.  To  use  the  distinction  to  the  best  advantage, 
we  shall  confine  it  to  marking  the  difference  between  the 
usual  expenditure  and  unanticipated  extra  demands,  arising 
in  most  cases  from  fresh  calls  on  the  State.  We  should 
describe  the  usual  annual  expenditure  on  military  and  naval 
forces,  the  cost  of  justice  and  education  as  normal  or 

1  For  the  different  uses  see  Wagner,  i.  135  sq.  ;  Cohn,  §§  157-9. 

2  The  English  budget  estimate  of  expenditure  for  1889-90  was  ^85,967,000  ; 
the  expenditure  for  that  year  was  £86,083,000  ;  an  error  of  less  than  one-seventh 
per  cent. 


124  PUBLIC   FINANCE.  [BOOK  I. 

'  ordinary.'  The  cost  of  a  war,  or  expenditure  for  the 
relief  of  distress  in  a  sudden  emergency,  is  on  the  other 
hand  plainly  '  extraordinary '  or  abnormal.  No  French 
financier  could  have  foreseen  the  burdens  that  the  Franco- 
German  war  of  1870-1  would  impose  on  his  country  ;  nor, 
though  the  probability  of  disturbance  was  recognised  in  the 
United  States  for  some  years  before  the  Civil  War,  could 
there  be  any  calculation  of  its  expense  l.  In  like  manner 
it  is  not  open  to  the  English  Government  to  provide  before- 
hand for  Irish  distress,  or  for  Indian  administrators  to  say 
whether  their  Finances  will  be  disturbed  by  famine.  War 
and — in  backward  countries — distress  approaching  to  famine 
are  events  that  do  recur,  and  though  it  is  not  possible 
to  forecast  their  effects  on  public  expenditure  for  short 
periods,  they  ought  to  be  taken  into  account  in  the  general 
scheme  of  Finance.  The  famine  fund  of  the  Indian  Govern- 
ment is  a  recognition  of  the  correctness  of  this  principle, 
and  though  the  cost  of  war  does  not  admit  of  the  same 
mode  of  treatment,  it  is  sound  policy  to  reduce  liabilities 
in  time  of  peace,  so  as  to  secure  some  relief  in  the 
extraordinary  charge  in  the  time  of  war 2. 

It  thus  appears  that,  by  taking  a  sufficiently  lengthy 
period  into  consideration,  the  separation  between  normal 
and  abnormal  outlay  may  be  so  attenuated  as  almost  to 
disappear.  The  conception  is  a  vague  one.  '  It  indicates,' 
as  Cohn  remarks,  '  an  undeveloped  stage  of  economic 
thought '  s  to  be  replaced  by  the  more  careful  estimation  of 
the  .future.  State  economy  expands  both  in  bulk  and 
duration.  The  expenditure  of  e.g.  England  under  the 


1  The  direct  cost  of  the  war  of  1870-1  to  France  has  been  estimated  at 
.£234,000,000.     Giffen,  Essays  in  Finance  (ist  Series),   1-55.     That  of  the 
American  Civil  War  at  .£1,800,000,000.     Wells  in  Cobden  Club  Essays  (2nd 
Series),  488.     Mr.  Bolles  gives  .£1,238,000,000   as   actually  paid  out   up   to 
1879,  financial  History  of  U.S.,  241  sq. 

2  '  The  amount  of  revenue  raised  in  time  of  peace,  ought  to  be  greater  than 
the  expenses  for  a  peace  establishment,  and  the  overplus  applied  to  the  discharge 
of  debts  contracted  in  former  wars.'     Hamilton,  National  Debt,  7. 

3  §  157. 


CHAP.  VIII.]  SOME  GENERAL  QUESTIONS  OF  EXPENDITURE.    125 

Tudors  was  likely  to  show  '  extraordinary,'  i.  e.  unusual 
elements  in  matters  that  are  at  present  well  within  the 
prevision  of  the  Chancellor  of  the  Exchequer.  When  the 
outlay  is  measured  by  thousands,  a  variation  in  hundreds  is 
serious,  but  when  it  reaches  millions  changes  of  thousands 
are  trifling,  besides  being  balanced  through  savings  in  some 
other  parts  of  expenditure.  There  is  also  in  modern  States 
a  greater  facility  for  foreseeing  and,  so  to  say,  *  discounting ' 
the  future.  The  refined  financial  mechanism  by  which 
public  borrowing  is  carried  out,  enables  '  extraordinary ' 
expenditure  for  a  short  period  to  be  transformed  into 
'  ordinary '  expenditure  for  a  long  one. 

Still,  the  development  just  noted  does  not  remove  com- 
pletely the  dividing-line  between  the  two  classes  of  ex- 
penditure. We  shall  find  later  on  1  that  both  on  financial 
and  political  grounds  it  is  eminently  desirable  to  have  the 
estimates  and  results  of  national  Finance  set  forth  fully  and 
in  unity  at  short  intervals,  usually  in  practice  annually.  But 
during  such  a  period  it  must  sometimes  happen  that  the 
amount  to  be  paid  out  of  the  National  Exchequer  will  be 
much  above  the  average,  and  it  follows  as  a  matter  of 
course  that  the  expenditure  is  then  'abnormal.'  What 
modern  Finance  can  accomplish  is  to  secure  a  more  even 
distribution  of  the  pressure. 

Another  point  for  consideration  is  found  in  the  fact  that 
what  is  at  first  extraordinary,  may  soon  become  ordinary, 
expenditure.  At  the  outbreak  of  war  the  cost  of  the  army 
and  fleet  will  be  greatly  increased,  giving  rise  to  abnormal 
outlay,  but  after  a  time,  say  after  the  first  year,  a  probable 
estimate  of  the  expenses  to  be  incurred  in  the  prosecution 
of  the  war  will  not  be  so  difficult.  The  financial  history  of 
England  affords  several  illustrations.  During  the  century 
and  a  quarter  from  1688  to  1815  there  were  the  following 
war  periods,  1688-1697,  1702-1713,  1718-1721,  1739-1748, 
1756-1763,  1776-1783,  1793-1802,  1803-1815.  At  the 
commencement  of  each  period  expenditure  was  greatly 

1  Infra,  Bk.  vi.  ch.  3. 


126  PUBLIC    FINANCE.  [BOOK  I. 

increased,  but  when  the  state  of  hostility  became  a  settled 
one,  it  was  possible  for,  and  therefore  incumbent  on,  the 
Minister  in  charge  of  the  Finances  to  present  the  outlay  on 
war  as  part  of  the  ordinary  expenditure.  Under  such  con- 
ditions the  charge  for  war  became  the  normal  charge  of 
an  abnormal  period. 

Abnormal  expenditure  also  frequently  occurs  in  a  some- 
what different  way,  as  in  the  case  of  durable  public  works 
or  other  improvements.  It  may  be  a  part  of  state  policy 
to  erect  extensive  public  buildings  ;  to  carry  dut  a  system 
of  fortifications,  of  railroads,  or  canals ;  to  drain  and  plant 
waste  lands  ;  to  promote  colonization,  or  to  develope  an 
industry  that  requires  the  aid  of  fixed  capital.  Innumerable 
examples  of  such  forms  of  expenditure  are  found  in  con- 
nexion with  local  government :  the  acquisition  of  the  in- 
dustries engaged  in  supplying  large  towns  with  water  and 
light,  will  at  once  occur.  Outlay  of  this  kind  is  in  mercantile 
phraseology  c  chargeable  to  capital,  not  to  revenue,'  and  is 
clearly  abnormal.  The  method  almost  invariably  adopted 
is  to  meet  the  abnormal  outlay  by  an  abnormal  receipt,  viz. 
borrowing ;  or,  to  put  the  point  in  another  way,  to  turn  the 
extraordinary  expense  of  a  given  year  into  the  ordinary 
one  of  interest  on  debt l. 

Much  ingenious  argument  has  been  advanced  in  favour 
of  borrowing  for  all  such  extraordinary  expenditure,  on  the 
ground  that  it  is  in  substance  a  creation  or  investment  of 
capital,  which  is  an  asset  to  be  placed  against  the  new 
liability 2.  The  plausibility  of  this  doctrine  in  its  extreme 
form  arises  from  failing  to  notice  the  different  effects  that 
may  follow  from  different  forms  of  State  expenditure. 

§  2.  For  understanding  the  point  it  is  necessary  to 
separate  State  outlay  into  '  productive '  and  '  unproductive,' 

1  The  theory  of  public  debts  and  borrowing  is  treated  in  Bk.  .v.  ch.  5.      In 
local  Finance  we  shall  see  that  borrowing  is  in  such  cases  the  only  course  open, 
as  otherwise  the  funds  could  not  be  obtained  owing  to  the  restraints  on  local 
taxing  powers. 

2  See  on  this  point  Bk.  v.  ch.  5.     C.  Dietzel  appears  to  be  the  originator  of 
the  theory.     He  is  followed  by  Stein  and  partly  by  Wagner. 


CHAP.  VIII.]   SOME  GENERAL  QUESTIONS  OF  EXPENDITURE.    127 

using  these  terms  in  the  sense  given  to  them  by  Adam 
Smith  1.  The  former  does  in  fact  secure  a  return  in  the 
shape  of  material  goods  possessing  value,  and  it  may  be 
said  that  expenditure  of  this  kind  is  admissible  even  by 
the  aid  of  loans.  The  general  category  of  productive 
expenditure  will  however  be  found  to  need  further  analysis. 
It  is  not  at  all  difficult  for  the  central  and  local  govern- 
ments to  expend  a  great  deal  in  obtaining  articles  that 
possess  value  but  yet  will  not  yield  revenue.  For  instance, 
the  many  buildings  existing  in  the  United  Kingdom  for 
the  meetings  of  legislative  bodies,  sovereign  and  subordinate, 
from  the  houses  of  Parliament  down  to  the  smallest  town- 
hall,  are  certainly  embodiments  of  value,  but  do  not,  except 
in  very  rare  cases,  bring  in  a  return.  They  are  *  consumers' 
capital,'  and  their  cost  must  be  supplied  from  other  sources. 
In  contrast  to  the  foregoing  are  those  forms  of  wealth  that 
return  a  revenue  by  their  use  as  'producers'  capital.' 
Municipal  gas  and  water  works  belong  to  this  class  ;  so  do 
the  continental  State  railways.  The  policy  of  expenditure 
on  such  works  is  plainly  to  be  judged,  partly  at  least;  as  a 
question  of  investment.  Public  bodies  may  succeed  in  realiz- 
ing good  value  for  their  outlay.  It  is  perhaps  on  the  whole 
best  to  divide  expenditure  into  'economic'  and  'non-econo- 
mic' rather  than  into  productive  and  non-productive  ;  outlay 
for  the  purpose  of  securing  future  revenue  being  '  economic,' 
while  that  which  will  not  have  this  result  is 'non-economic.' 
The  expediency  of  economic  outlay  is  really  a  question 
closely  connected  with  the  formation  of  State  property  and 
the  (so-called) '  private  revenue/  and  has  to  be  treated  under 
that  head2.  Non-economic  outlay  includes  the  procuring 
of  material  goods  that  are  not  productive  capital  as  well  as 
the  cost  of  those  public  services  that  take  no  tangible 
form.  It  may  be,  and  often  is,  more  necessary  than  pure 
economic  expenditure,  but  it  cannot  be  regarded  as  a 
creation  of  capital.  National  security  and  honour,  the 

1   Wealth  of  Nations,  Bk.  ii.  ch.  3. 
3  Bk.  ii.  ch.  3. 


128  PUBLIC   FINANCE.  [BOOK  I. 

promotion  of  culture  and  education  may  be  better  than 
wealth,  but  they  are  not  wealth,  and  their  cost  is  so  far  a 
deduction  from  the  stock  or  accumulated  wealth  of  the 
society.  They  belong  to  consumption  not  to  production, 
and  the  outlay  on  them  has  to  be  limited  by  economic 
considerations.  Thus  this  case  is  closely  parallel  to  that 
of  the  individual  whose  expenses  for  enjoyment,  general 
education,  &c.  reduce  his  economic  resources  and  have  to 
be  limited  by  the  amount  of  his  income. 

Some  expenditure,  both  of  individuals  and  of  public 
bodies,  may  prove  to  be  indirectly  productive.  What  a 
person  spends  on  recreation  may  so  improve  his  health, 
both  physical  and  mental,  as  to  make  his  labour  more 
efficient.  The  State  may  likewise  by  its  maintenance  of  a 
powerful  army  and  navy  or  an  active  police  increase  the 
production  of  wealth,  and  in  practice  all  public  expenditure 
has  this  amongst  other  aims  in  view l. 

§  3.  Though  public  and  private  expenditure  have  so  many 
points  of  resemblance,  there  is  one  very  important  difference. 
The  individual's  income  is  formed  by  the  returns  on  his 
property  and  the  reward  of  his  exertions.  Public  income 
or  revenue  is  to  some  extent  composed  of  similar  con- 
stituents, but  in  modern  times  it  is  mainly  derived  from 
contributions  levied  compulsorily  on  the  members  of  the 
society  ;  that  is  to  say,  state  income  or  revenue  is  derivative, 
and  is  dependent  on  national  income ;  local  public  revenue 
is  in  like  manner  derived  from  the  revenue  of  the  com- 
munity in  its  locality. 

This  connexion  of  public  and  national  revenue  has  been 
recognised  from  the  earliest  days  of  Finance  :  it  is  to  it  that 
we  owe  in  great  measure  the  commercial  policy  of  Europe 
in  the  sixteenth  and  seventeenth  centuries.  The  Physio- 
crats also  accepted  it,  as  Quesnay's  famous  makim  'pauvres 
pay  sans,  pauvre  royatime;  pauvre  royaume^pauvre  roi  'shows. 
It  is  an  essential  doctrine  of  modern  theory,  though  there 

1  Supra,  Bk.  i.  ch.  6.  §  i. 


CHAP.  VIII.]  SOME  GENERAL  QUESTIONS  OF  EXPENDITURE.    129 

is  hot  perfect  agreement  on  the  question  whether  it  is 
on  'net'  or  'gross'  national  revenue  that  State  income 
depends1.  There  can  be  no  doubt  that  a  small  nation 
with  little  accumulated  wealth  cannot  adopt  the  same  scale 
of  outlay  as  a  larger  and  wealthier  one,  and  one  of  the 
rules  of  good  Finance  is  to  observe  moderation  in  the 
demands  of  the  State  on  its  citizens.  Beyond  this  general 
precept  no  definite  result  has  been  reached.  Some  writers 
have  suggested  a  percentage  limit  for  State  outlay.  Justi 
regards  i6per  cent,  as  the  average,  25  per  cent,  as  excessive. 
Hock  states  15  per  cent,  as  the  upper  limit.  Leroy-Beau- 
lieu,  who  confines  his  discussion  to  the  amount  of  taxation, 
arranges  the  charge  on  national  income  for  State  ends 
in  grades  :  5  per  cent,  he  thinks  light,  between  5  and  10  per 
cent,  moderate,  over  the  latter  figure  heavy,  and  when  15  or 
1 6  per  cent,  is  reached  it  is  almost  impossible  to  increase  it  -. 
Any  attempt  to  settle  once  for  all  the  proper  proportion 
of  public  expenditure  to  national  income  is  necessarily 
vitiated  by  the  different  elements  to  be  taken  into  account ; 
such  as  (i)  the  object  of  the  outlay;  if  it  has  an  economic 
end  a  larger  amount  may  be  taken,  since  it  is  expected  to 
yield  a  direct  return,  and  even  if  not  for  economic  ends,  no 
decision  can  be  made  until  the  urgency  of  the  want  is 
known.  A  nation  engaged  in  a  conflict  perhaps  involving 
its  national  existence  is  justified  in  expenditure  that  would 
in  ordinary  times  be  imprudent.  (2)  The  amount  of  the 
national  income  is  also  a  factor  to  be  considered.  Ex- 
penditure requiring  10  per  cent,  of  the  annual  income  of 
India  would  be  much  more  burdensome  than  if  30  per  cent, 
were  to  be  required  in  England  or  the  United  States.  (3) 
The  distribution  and  the  forms  of  wealth,  though  less  in 
importance,  have  some  effect  on  spending  power.  The 
bounds  of  outlay  in  any  given  case  can  only  be  ascertained 

1  Schaffle  and  Schmoller  have  both  suggested  that  '  net  income'  is  not  the 
only  source  of  public  revenue. 

*  For  Justi  see  Roscher,  Geschichte,  463.  See  also  Hock,  35  ;  Leroy-Beaulieu, 
i.  127  sq.,  esp.  133. 

t  K 


130  PUBLIC    FINANCE.  .[Boox  I. 

by  trial,  though  it  is  plain  that  the  agreement  of  the  writers 
referred  to  above  supports  the  belief  that  15  per  cent,  of 
the  national  income  is  too  large  an  amount  to  appropriate 
for  State  objects,  unless  in  very  exceptional  cases. 

§  4.  Other  methods  of  measuring  the  proper  amount  of 
State  expenditure  are  still  more  doubtful.  We  might  take 
the  proportion  to  area  as  a  guide,  were  it  not  for  the  fact 
that  the  extreme  differences  in  the  value  of  land  in  different 
countries,  as  also  the  varying  proportions  that  other  forms 
of  wealth  bear  to  land,  make  this  test  fallacious.  The 
amount  of  accumulated  wealth  as  estimated  in  modern 
statistical  inquiries l  might  be  used,  but  we  shall  find  that 
income  (not  property)  is  the  fund  out  of  which  in  ordinary 
cases  expenditure  has  to  be  met,  and  the  relation  of  income 
to  property  varies.  A  very  commonly-used  index  is  the 
charge  per  head  of  population,  though  for  this  purpose  it  is 
far  inferior  even  to  the  amount  of  property.  An  attempt 
to  measure  the  comparative  pressure  caused  by  expenditure 
in  India  and  in  the  Australasian  Colonies  based  on  taking 
the  charge  per  head,  would  give  the  astonishing  result 
that  it  was  about  nineteen-fold  heavier  in  the  latter  2. 

Such  considerations  lead  to  the  belief — which  indeed 
ought  to  be  obvious — that  there  is  no  mechanical  mode  of 
judging  the  sufficiency  or  the  legitimacy  of  public  ex- 
penditure, a  belief  that  is  strengthened  by  remembering 
that  local  expenditures  must  be  added  to  that  of  the  central 
government  before  the  full  pressure  can  be  known,  and  that 
a  series  of  complicated  calculations  is  needed  to  apportion 
the  combined  charges  over  the  several  districts. 

Fortunately  the  question  of  expenditure  in  all  its  forms 
does  not  present  itself  as  a  single  problem.  It  would  be 
quite  hopeless  to  attempt  to  prepare  a  budget  of  outlay  for 

1  Such  as  those  of  MM.  Giffen,  De  Foville,  and  Pantaleoni,  for  England, 
France,  and  Italy,  respectively. 

3  Victorian  Year  Book,  1887-8,  i.  203,  where  a  table  of  comparative  taxation 
is  given.  In  India  and  Australasia  the  proportion  of  tax  to  non-tax  revenue  is 
almost  the  same  (40  per  cent.),  and  the  rate  per  head  in  India  for  1885-6  was 
y.,  while  averaged  over  the  Australasian  colonies  it  was  £2  i*js. 


CHAP. VIII.]   SOME  GENERAL  QUESTIONS  OF  EXPENDITURE.    131 

any  country  without  the  aid  of  the  material  collected  during 
previous  experience.  The  great  mass  of  expenditure  is 
taken  as  settled,  and  it  is  only  the  particular  changes  that 
have  to  be  anxiously  weighed  in  order  to  estimate  their 
probable  advantage.  This  method  of  treatment  simplifies 
the  issues  very  much.  In  the  language  of  modern  economists 
it  is  'final '  rather  than  'total'  expenditure  that  needs  the 
financier's  attention.  Though  the  increments  dealt  in  are 
not  of  inconsiderable  magnitude,  a  further  reduction  can 
be  made  by  taking  increments  of  those  increments  into 
account. 

§  5.  The  usual  form  that  deliberation  has  to  take  is  that 
of  considering  the  advisability  of  increased  expenditure. 
Theoretically  it  is  of  course  equally  possible  to  debate  the 
benefits  of  retrenchment,  but  in  nearly  all  modern  States 
outlay  is  steadily  increasing.  The  older  doctrines  of 
economy  and  frugality  have  disappeared,  and  in  nearly 
every  direction  proposals  for  new  exertions  on  the  part  of 
the  State  are  put  forward  l. 

First  as  to  the  facts  :  we  may  take  a  few  typical  examples. 
English  expenditure  in  1833  was  48^  millions,  in  1889-90 
it  was  over  86  millions,  or  an  increase  of  over  37  millions. 
As  1833  marks  the  lowest  point  of  English  general  ex- 
penditure, it  will  be  fairer  to  take  another  set  of  examples 
given  by  Mr.  Gladstone. 

'The  gross  expenditure  of  the  State  was  in  1842-43 
£55,223,000,  and  the  local  expenditure  in  the  three  king- 
doms was  £13,224.000,  making  a  total  in  round  numbers  of 
£68,500,000.  In  1853-4  the  total  State  expenditure  was 
£55,769,000,  or  very  nearly  the  same  amount  as  in  1842-3, 
and  the  local  expenditure  £15,819,000  ;  making  together 
in  round  numbers  £71,500,000,  instead  of  the  £68,500,000 
which  was  the  amount  in  1842-3.  In  the  year  1859-60 
the  gross  State  expenditure  had  grown  from  £55)7^95°°° 
which  it  was  in  1853  to  £70,123,000.  The  local  expendi- 


1  During  the  Parliamentary  Sessions  1880-2,  out  of  576  financial  proposals, 
556  were  for  increase  of  expenditure,  only  20  for  reduction. 

K  2 


132  PUBLIC    FINANCE.  [BOOK  I. 

ture,  no  doubt  actuated  by  a  spirit  of  honourable  rivalry, 
had  increased  in  the  same  period  from  £15,8 19,000  which 
it  was  in/ 1 853  to  at  least  .£17,458,000,  and  probably  some- 
thing rrfore;  the  total  expenditure  for  the  year  1859-60 
thus  reached  £87,697,000  [?].  Accordingly  it  appears  that 
in  the,  eleven  years  from  1842-3  to  1853-4  the  expenditure 
of  the  country  under  the  two  comprehensive  heads  which 
I  have  mentioned  increased  at  the  rate  of  4!  per  cent., 
nearly  the  whole  of  the  increase  being  local,  while  in  the 
six  years  which  have  elapsed  between  1853  and  1859  it 
became  much  more  mercurial  and  increased  at  the  rate  of 
22j  per  cent.,  by  far  the  larger  part  and  greater  rate  of 
increase  being  now  imperial  V 

To  complete  the  illustration,  we  may  state  that  for  the 
year  1879-80  the  national  expenditure  had  risen  to 
£82,184,000,  and  the  local  expenditure  to  £61,174,000, 
making  a  total  of  £143,358,000,  or  an  increase  over  1859- 
60  of  over  60  per  cent. ;  and  finally,  that  in  1886-7  tne 
national  expenditure  was  £89,996,000,  and  the  local  ex- 
penditure £65,974,000,  giving  a  total  outlay  of  £155,970,000, 
or  in  round  figures  156  millions,  being  an  increase  of  87  J 
millions  over  the  expenditure  of  1842-3,  i.  e.  127  per  cent. 

France  presents  a  similar  movement.  In  1820  the 
general  expenditure  was  906  million  francs,  by  1860  it  had 
reached  2084  million  francs,  or  much  over  double  ;  more 
precisely,  130  per  cent.  The  budget  estimate  for  1890  is 
3769  millions,  giving  a  growth  since  1860  of  80  per  cent. 

The  Italian  expenditure  of  1861  was  812  million  lire: 
the  estimate  for  1889-90  is  1857  million  lire,  an  increase  of 
1045  million  lire,  giving  a  growth  in  28  years  of  128  per 
cent. 

The  Prussian  budget  in  1849  was  282  million  marks,  in 
1865  it  had  grown  to  nearly  507  million  marks.  Since  the 
formation  of  the  North  German  Confederation  (1866)  and 
the  German  Empire  (1871)  the  increase  has  continued, 

1  Budget  Speech  of  1860  in  Financial  Statements,  119. 


CHAP. VIII.]    SOME  GENERAL  QUESTIONS  OF  EXPENDITURE.    133 

the  actual  expenditure  in  1885-6  being  1376  million  marks, 
and  the  estimate  for  1890-1,  1591  million  marks. 

The  smaller  German  States  exhibit  like  features.  Bavaria 
spent  thirty-two  million  marks  in  1819-20  ;  the  estimated 
expenditure  for  1889  was  2^°  million  marks. 

In  Austria,  Russia,  and  even  in  small  States  like  Belgium, 
we  find  the  same  general  tendency  towards  increased  outlay. 
In  the  last-mentioned  country,  whose  administration  has 
been  well-conducted,  the  expenditure  in  1835  was  87  million 
francs,  the  estimate  of  ordinary  expenditure  for  1890  is 
321  million  francs,  making  (with  the  usual  extraordinary 
expenditure)  a  fourfold  increase. 

So  well-established  is  the  general  fact  of  increasing  out- 
lay— and  whoever  doubts  it  need  only  run  over  the  examples 
just  given — that  even  conservative  writers  on  Finance,  such 
as  Roscher  and  Umpfenbach,  lay  it  down  as  a  general  law 
of  progress l ;  and  they  explain  it  by  reference  to  the 
increasing  demands  made  by  society  on  the  modern  State. 
*  What  judgment  should  we  pass,'  asks  the  former,  '  on  a 
government  that,  after  the  manner  of  the  Middle  Ages,  did 
not  trouble  itself  about  the  health,  mental  training,  main- 
tenance, or  enriching  of  the  people  ? '  And  so  far  there  is 
no  doubt  that  the  intensifying  of  State  duties  is  one  cause 
of  the  almost  universal  increase.  In  previous  chapters  we 
have  seen  how  the  cost  of  defence,  of  administration,  and 
the  minor  needs  of  civilization  have  gone  to  swell  the 
growing  totals  of  modern  budgets,  and  in  each  case  special 
causes  have  appeared  that  went  far  to  explain  the  final 
result. 

Before  collecting  these,  it  may  be  well  to  correct  to  some 
extent  the  impression  that  increasing  figures  of  outlay  are 
apt  to  produce.  Leroy-Beaulieu  remarks  *  that  one  cause 
of  the  general  increase  is  to  be  found  in  the  depreciation  of 
the  precious  metals.  As  expenditure  is  estimated  in  terms 
of  money,  any  change  in  the  value  of  the  circulating  medium 
should  be  taken  into  account,  and  the  application  of  some 

1  Roscher,  §  no;  Umpfenbach,  38.  2  ii.  159. 


134  PUBLIC    FINANCE.  [BOOK  I. 

test  as  to  the  reduced  purchasing  power  of  money  would 
considerably  alter  the  figures   for  the  earlier  part  of  the 
period  that  we  have  taken,  i.e.  from  1820  to  1870,  but  for 
the  last  twenty  years  the  correction  would  act  in  the  other 
direction.     Increases  in  outlay  since  1873  would  certainly 
mean  more  than  the  amount  as  measured  in  money,  so  that 
we  cannot  place  much  stress  on  this  part  of  the  explanation 
of  increase.     Another  element  is  however  important.     In 
most  countries  population  is  growing,  and  national  income 
grows  with  it ;  and   in  the  exceptional  cases  where,  as  in 
France,  population  is  stationary,  income  is  increasing.     It 
therefore  is  not  certain  that  the  proportion  of  public  outlay 
to  national  income  has  become  greater.    Moreover,  and  this 
is  the  most  important  consideration,  the  extension  of  the 
economic  activity  of  the  State  in  certain  directions  has  been 
accompanied  by  a  passage  of  special  industries  from  private 
to  public  management.     As  a  necessary  consequence,  public 
expenditure  and  income  are  both  increased  without  the  real 
pressure  on  the  people  becoming  greater.     It  may  be  that 
in  this  tendency  there  lies  in  Roscher's  phrase  '  ein  com- 
munistischer  Zugl  and  it  is  plain  that  the  transfer  in  this 
manner    of    all    industries   means    the    establishment     of 
socialism  pure  and  simple.    But  apart  from  its  economic 
reactions,  financial   theory   is    not   entitled   to   absolutely 
condemn  this    movement.     Its  duty  is   however  to  point 
out  that  comparison  between  the  expenditure  of  a  State 
with   large   industrial   enterprises    in  its   charge  and   one 
without  them  is  illegitimate  unless  due  correction  is  made. 
To  take  a  simple  illustration,  it  is  plain  that  if  the  State 
purchased  the  English  railways,  and  the  accounts  entered 
into  the  national  budget  (as  they  should),  both  expenditure 
and  income  would  be  largely  increased.     This  has  actually 
happened   in    Prussia,  and  explains  a   large   part   of  the 
increase  in  outlay  in  that  country  *. 

1  The  estimated  expenditure  on  the  Prussian  State  railways  in  1890-1  was 
522  million  marks,  besides  the  part  of  the  total  debt  which  was  due  to  their 
purchase.  The  receipts  however  were  estimated  at  851  million  marks. 


CHAP.  VIII.]   SOME  GENERAL  QUESTIONS  OF  EXPENDITURE.    135 

Notwithstanding  these  extenuations,  there  has  been  we 
believe  an  increase  in  expenditure  that  is  not  balanced  by 
receipts  from  the  property  of  the  State,  and  this  larger 
outlay  may  be  attributed  to  the  following  causes : — 

(1)  The  cost  of  war  and  preparation  for  war.     We  need 
not  repeat  the  details  already  given  on  this  subject1,  but 
we    ought   to   emphasize  the   general   fact     The   annual 
military  and  naval  expenditure  of  Europe  is  £140,000,000, 
and  the  disturbance  to  industry,  the  apprehension  of  hos- 
tilities, and  above  all  the  interest  on  debts  incurred  for  the 
most  part  for  the  pupose  of  war,  considerably  increases  the 
burden  2.     As  if  to  enable  us  to  judge  of  its  effects,  a  test 
case  has  been  provided    in   the   condition  of  the  United 
States,  which   further  shows  that  it  is  not  war,  but  the 
necessity   of  constant    readiness  for  it,  that   affects  most 
injuriously  the  economic  interests  of  nations. 

(2)  A  second  cause  is  to  be  found  in  the  extension  of 
administrative  action.     To  maintain  a  large  staff  of  com- 
petent officials  considerable  outlay  is  needed,  much  of  it 
necessarily  wasteful.     It  may  be  that  a  great  deal  of  official 
work  does  with  advantage  to  society  what  men  are  too 
busy  or  too  careless  to  do  for  themselves.     Perhaps  also 
it   checks   some   moral   and   social   evils,   but,  financially 
speaking,  it  is  undoubtedly  costly,  and  if  the  end  could  be 
otherwise  gained  it  would  be  an  economic  benefit. 

To  these  causes  many  would  add  a  third,  viz.  the  pro- 
gress of  democracy  3.  It  is  argued  that  a  widely  extended 
suffrage  lowers  the  standard  of  the  legislatures,  and  that 
under  the  influence  of  socialistic  ideas  the  expenses  of  the 
State  are  increased.  There  is  probably  some  truth  in  this 
doctrine.  The  '  new  radicalism  '  is  not  desirous  of  economy 
in  expenditure4,  and  it  may  be  freely  conceded  that 

1  Supra,  Bk.  i.  ch:  2. 

2  Neymarck,  Les  Dettes  Publiques,  89. 

3  Leroy-Beaulieu,  ii.  169  sq. 

4  The  contrast  between  the  doctrines  of  The  Radical  Programme  (ch.  8, 
'  Taxation  and  Finance '),  and  those  of  Cobden,  Bright,  and  George  Grote,  is 
very  extreme. 


136  PUBLIC   FINANCE.  [BOOK  I. 

*  democratic  Finance '  is  remarkable  for  its  disregard  of 
principles  and  its  utter  incapacity  to  measure  financial  forces ; 
but  on  the  whole  it  cannot  be  said  that  Russian  Finance, 
which  is  certainly  not  democratic,  is  much  superior  in  these 
respects.  Nor  is  it  plain  that  English  Finance  before 
the  Reform  Act  of  1832  was  worthy  of  commendation. 
The  socialistic  element  in  modern  democracy  has  an 
injurious  influence  on  Finance,  but  it  is  not  an  essential 
part  of  it.  The  technical  administration  of  revenue  and 
expenditure  is  also  likely  to  suffer  while  under  the  control 
of  an  untrained  democracy.  But  allowing  all  this,  the 
real  enemy  of  sound  Finance  is  ignorance  whenever  it 
attains  to  power,  an  event  which  is  unfortunately  too 
common  under  all  forms  of  government. 

§  6.  Any  discussion  of  public  expenditure  that  neglected 
to  notice  its  influence  on  national  and  social  economy  would 
be  incomplete.  The  State  through  its  central  and  local 
organs  is  by  far  the  greatest  purchaser  of  goods  and 
employer  of  services  ;  it  can  in  this  way  powerfully  in- 
fluence prices  and  wages,  and  through  that  influence  affect 
the  distribution  of  wealth.  The  sum  of  ;£  150,000,000 
annually  disbursed  (after  allowing  for  the  amount  that 
goes  as  interest  on  loans  which  operate  on  the  money 
market)  must  both  by  its  great  amount  and  its  changed 
direction  alter  the  structure  of  the  British  national  industries. 
Demand  for  commodities  determines  the  direction  that 
production  will  take,  and  consequently  the  form  of  labour 
in  many  cases  depends  on  the  policy  of  the  State ;  so  also 
do  the  rates  of  remuneration  and  the  conditions  of  employ- 
ment l.  The  economic  systems  of  Germany  and  the 
United  States  owe  their  different  features  largely  to  the 
special  direction  of  state  activity  in  each  country.  The 
technical  arrangements  for  the  supply  of  commodities  for 
public  requirements  are  a  serious  consideration  for  adminis- 
trators owing  to  their  ulterior  effects.  Government  manu- 

1  Hermann,  Staatsivirthschaftliche  Untersuchimgen  (2nd  ed.),  465,  indicates 
this  very  clearly. 


CHAP.  VIII.]    SOME  GENERAL  QUESTIONS  OF  EXPENDITURE.    137 

facture  is  liable  to  the  evils  of  expense  and  inferiority 
in  quality  of  products,  but  the  alternative  method  of 
purchase  in  the  open  market,  necessarily  carried  out 
through  agents,  is  not  free  from  similar  evils.  In  par- 
ticular, the  result  of  giving  contracts  at  the  lowest  tender 
has  been  vehemently  assailed  by  reformers  as  tending 
to  lower  wages1.  The  direct  employment  of  services 
or  labour  by  the  State  gives  rise  to  further  complications. 
Hiring  on  the  ordinary  system  and  at  the  market  rate 
is  impossible  in  the  case  of  the  higher  officials,  while  for 
military  and  naval  services  special  conditions  of  engage- 
ment are  needed.  The  great  extent  and  variety  of  the 
general  Civil  Service  makes  the  determination  of  its  proper 
remuneration  a  question  of  much  difficulty.  To  avoid  the 
political  evils  that  short  tenure — as  in  the  American 
system — causes,  its  members  ought  to  be  permanently 
employed.  Permanence  in  state  service  soon  affects  pri- 
vate employers,  who  will  have  to  give  either  like  security 
of  tenure  or  better  pay2.  In  every  part  of  national  life 
this  influence  of  state  expenditure  is  felt,  and  it  is  becom- 
ing greater. 

The  great  and  increasing  importance  of  state  outlay 
does  not  however  afford  a  presumption  that  the  move- 
ment is  advantageous.  The  current  of  modern  sentiment 
runs  as  strongly  at  present  in  favour  of  state  action  as 
it  did  fifty  years  ago  against  it,  but  neither  tendency  can 
be  its  own  justification  ;  both  have  to  be  judged  on  the 
grounds  of  reason  and  experience.  Some  popular  argu- 
ments for  state  expenditure  may  be  at  once  dismissed. 
Perhaps  the  crudest  is  that  which  regards  the  State  as 
affording  employment,  and  imagines  that  if  war  and  the 
other  conditions  which  call  for  state  services  were  to  cease, 
there  would  be  no  field  for  the  labour  of  those  now  em- 
ployed as  soldiers,  policemen,  and  officials.  This  obvious 

1  C.  Kingsley,  Cheap  Clothes  and  Nasty. 

2  On  this  point  cp.  Prof.  Foxwell's  article  in  Claims  of  Labour,  254.     For 
further  observation  of  state  dealings  with  labour,  see  Bk.  ii.  ch.  3. 


138  PUBLIC    FINANCE. 

fallacy  arises  from  entirely  overlooking  the  previous 
existence  in  private  hands  of  the  funds  collected  by  the 
State  as  its  income,  and  which  would  afford  like  employ- 
ment, but  on  other  lines :  the  best  practical  refutation  is 
however  found  in  the  ease  with  which  the  enormous  ex- 
penditure of  the  United  States  during  the  Civil  War  was 
reduced  at  its  conclusion,  and  the  military  forces  absorbed 
in  various  industrial  employments  1.  Expenditure  of  itself 
is  plainly  not  a  good,  it  has  to  be  judged  by  its  object, 
i.  e.  by  the  benefits  obtained  in  return  for  the  sacrifices 
made.  By  taking  this  view  we  avoid  the  opposite  fallacy 
that  all  state  outlay  is  bad,  or  at  all  events  that  the  less  the 
expenditure  the  better.  This  doctrine,  though  accepted  by 
Say  and  Ricardo 2,  is  palpably  incorrect,  since  it  takes  no 
account  of  one  of  the  two  factors  in  the  problem.  It  is 
not  true  that  the  cheapest  article  is  the  best,  nor  is  '  the 
cheapest  State  '  the  most  serviceable.  That  state  organiza- 
tion is  the  best  and  really  the  cheapest  which,  all  elements 
of  the  question  being  taken  into  account,  gives  the  greatest 
amount  of  benefit  to  its  citizens  and  provides  best  for  the 
future  progress  of  the  nation. 

1  Wells  in  Cobden  Club  Essays  (2nd  Series),  491. 

2  '  The  golden  maxim  of  M.  Say  "that  the  very  best  of  all  plans  of  finance 
is  to  spend  little,  and  the  best  of  all  taxes  is  that  which  is  the  least  in  amount." ' 
Ricardo,  Works,  145. 


BOOK   II. 

PUBLIC    REVENUE. 

THE  ECONOMIC  OR  QUASI-PRIVATE  RECEIPTS. 


CHAPTER    I. 

THE  FORMS  AND  CLASSIFICATION  OF  PUBLIC 
REVENUES. 

§  1.  A  SYSTEM  of  public  expenditure  such  as  has  been 
examined  in  the  preceding  book  requires  as  its  necessary 
basis  a  corresponding  public  revenue.  State  economy  is 
in  nowise  exempt  from  that  condition  of  all  private 
economies,  which  makes  it  essential  to  provide  that  con- 
sumption shall  be  balanced  by  production  and  that  effort 
must  be  put  forth  in  order  to  procure  satisfaction.  In 
respect  to  the  public  power  there  is  a  wider  field,  but  no 
change  in  the  nature  of  things  ;  the  correlation  of  exertion 
and  enjoyment  holds  here  as  elsewhere,  and  if  tem- 
porarily disturbed  is  certain  to  be  sooner  or  later  re- 
established. All  financial  systems  are  in  fact  compelled 
to  recognise  the  relation,  though  political  exigencies  may 
sometimes  make  it  inconvenient  to  adopt  a  line  of  conduct 
completely  in  accordance  with  that  recognition.  Every 
Parliamentary  Government  has  arrangements  for  raising 
funds  as  well  as  for  granting  supplies.  In  England  the 
Committee  of  Ways  and  Means  is  quite  distinct  from  the 
Committee  of  Supply  l  ;  and  in  the  United  States  the  small 
House  Committee  on  Ways  and  Means  is  composed  of 
different  members  from  that  of  the  Committee  on  '  Appro- 
priations.' There  seems  to  be  an  instinctive  feeling  that 

1  Though  each  is  simply  the  House  of  Commons  sitting  under  a  special 
name. 


142  PUBLIC    FINANCE.  [BOOK  II. 

the  raising  of  revenue  should  be  formally  separated  from 
the  more  agreeable  occupation  of  applying  it  for  the 
public  requirements. 

Public  revenue,  then,  being  the  counterpart  or  obverse  of 
expenditure,  it  becomes  our  duty  to  consider  its  forms 
and  sources,  and  to  see  how  far  they  admit  of  logical 
grouping  and  arrangement. 

§  2.  This,  like  most  financial  questions,  needs  to  be 
studied  at  first  from  the  historical  side.  The  early  tribe 
shows  us  expenditure  and  revenue  in  combination  ;  the 
services  and  commodities  required  for  public  use  are 
directly  levied  and  applied  to  the  particular  end  l.  When 
once  this  primitive  stage  is  passed,  revenue  as  distinct  from 
expenditure  emerges,  and  its  collection  and  administration 
become  matters  of  vital  concern  to  the  growing  state 
organization.  It  is  true  that  for  a  long  time  contributions 
of  goods  are  levied  in  kind,  but  their  employment  is  more 
complicated,  and  involves  redistribution  of  the  different 
forms  of  wealth  obtained  by  the  State.  With  the  intro- 
duction of  money  the  divorce  between  the  revenue  col- 
lected and  the  expenditure  undertaken  is  finally  established, 
since  public  agents  can  directly  buy  what  they  need  for 
the  public  service,  while  the  revenue  is  brought  in  under 
the  form  of  the  general  medium  of  exchange.  What 
strikes  the  observer  most  forcibly  in  contemplating  this 
development  is  the  extreme  variety  of  the  forms  of 
revenue  or  state  receipts.  Dues  levied  on  land,  on  goods 
of  all  kinds,  on  the  performance  of  different  acts,  in 
addition  to  all  the  kinds  of  individual  revenue,  are  enjoyed 
by  the  State.  The  Roman  Finances  received  contributions 
from  very  many  and  diverse  sources,  and  so  did  the 
Exchequers  of  mediaeval  sovereigns.  When  we  run  over 
the  long  lists  that  appear  in  legal  and  historical  works 
treating  of  this  side  of  mediaeval  law  and  economy,  the 
greatest  difficulty  is  to  reduce  them  to  some  manageable 

1  Supra,  Bk.  i.  ch.  i.  §  7. 


CHAP.  I.]   PUBLIC  REVENUES  :   FORMS  AND  CLASSIFICATION.    143 

form l.  This  complexity  seems  to  have  puzzled  the  earliest 
scientific  students  of  Finance.  Bodin,  as  noticed  before, 
arranged  the  sources  of  revenue  under  seven  heads,  but 
Klock,  who  fairly  represents  the  German  views  of  the 
seventeenth  century,  gives  a  far  more  extensive  list.  The 
*  chamber  science '  writers  were  more  successful  in  group- 
ing the  forms  of  revenue  under  (i)  those  from  the  domain 
of  the  sovereign,  (2)  the  so-called  *  regalia '  or  prerogative 
rights,  and  (3)  taxes.  In  Adam  Smith's  hands  the  double 
aspect  of  the  State  became  the  basis  of  classification. 
Regarded  as  an  artificial  personality  or  (in  the  language 
of  modern  jurisprudence)  'juristic  person,'  it  might  hold 
property  and  engage  in  trade.  Revenue  obtained  in  such 
ways  'peculiarly  belonged  to  the  sovereign.'  It  was  his 
quasi -private  income.  In  another  aspect  as  sovereign  or 
supreme  power  he  was  able  to  impose  charges  on  the 
revenues  of  his  subjects,  and  these  contributions  or  '  taxes  ' 
formed  the  second  group  of  state  receipts.  The  simplicity 
and  clearness  of  this  classification  commended  itself  to 
English  and  French  writers,  who  have  almost  universally 
adopted  it.  The  greater  political  development  of  France 
and  England,  by  making  taxation  the  most  important 
part  of  the  state  income,  favoured  its  acceptance.  The 
remains  of  the  feudal  system  were  more  numerous  in 
Germany,  and  its  methods  of  Finance  in  particular,  with  all 
their  variety  and  confusion,  were  slow  in  disappearing  from 
that  country.  Consequently  German  Finanzwissenschaft 
aimed  at  so  arranging  the  forms  of  revenue  as  to  give 
harmony  and  consistency  to  the  existing  systems.  The 
'  regalia '  or  prerogatives  were  always  regarded  with  parti- 
cular attention,  and  it  was  sought  to  place  them  alongside 
of  taxation  as  a  head  of  revenue. 

Rau  is  in  great  measure  responsible  for  another  addition 

1  Thus  Blackstone  (i.  281-337)  gives  twenty-one  different  rights  as  com- 
posing the  '  ordinary '  revenue  of  the  King,  from  which  enumeration  taxes  are 
excluded.  Cibrario  describes  twenty-four  heads  of  revenue  in  mediaeval  Italy, 
Economic,  Politico,  del  medio  aevo,  Lib.  iii.  cap.  6. 


144  PUBLIC    FINANCE.  [BOOK  II. 

to  the  main  groups,  viz.  that  of  'fees'  (Gebiihreii).  He 
noticed  that  in  many  cases  public  institutions  gave  special 
benefits  for  which  they  charged  an  equivalent ;  e.  g.  in  law 
proceedings  fees  were  asked  from  the  litigants.  It  was  natural 
to  regard  this  class  of  objects  denoted  by  a  special  name 
as  a  separate  and  independent  form  of  revenue,  giving  as 
a  final  result  that  state  receipts  were  distributed  under  four 
heads  :  (i)  'Private'  industry  of  State,  (2)  Prerogative  rights, 
(3)  Fees,  (4)  Taxes.  On  this  classification  of  public  revenues 
most  of  the  controversies  as  to  arrangement  in  German 
financial  works  turn.  It  is  too  plain  for  dispute  that  the 
first  and  fourth  of  the  above-mentioned  heads  must  be 
kept  apart,  but  in  the  endeavours  to  bring  the  two  inter- 
mediate divisions  into  some  form  of  combination  with  them, 
great  difference  of  opinion  is  to  be  found.  One  set  of 
writers  oppose  '  Taxes '  to  the  three  other  forms  of  revenue, 
which  are  joined  under  some  more  general  term 1.  Others 
place  Taxes  and  '  Fees '  under  one  head  and  oppose  them 
to  the  '  quasi-private  income '  and  prerogative  dues,  or 
with  greater  wisdom  eliminate  the  latter  from  the  division 
altogether  2.  There  is  even  a  decided  tendency  in  the  latest 
inquirers  to  come  back  by  a  somewhat  devious  route  to 
the  plainer  position  of  Adam  Smith,  and  to  recognize  only 
the  two  great  divisions  of  state  revenue  into  (i)  quasi- 
private  and  (2)  public,  though  distinguishing,  as  he  has 
done,  between  the  cases  of  extra  payment  for  special 
services".  A  detailed  examination  of  the  many  points 
raised  in  the  controversy  on  this  subject  of  classification 
would  lead  us  too  far,  but  some  of  the  results  are  too. 
important  to  be  passed  over  and  must  be  briefly  noted. 

1  This  is  the  course  followed  by  Stein  and  Roscher  :   the  former  (i.  138  sq.) 
speaks  of 'economic*  income;   the  latter  of 'whole  or  half  private  economic 
state  receipts,'  Bk.  i.  chs.  4,  5  (69-107). 

2  Umpfenbach,  who  substitutes  the  term  'Fiscal  prerogative  rights'  (Vor- 
rechte)  for  '  regalia^  takes  the  former  course,  78  ;  Wagner,  i.  487  sq.,  ii.  33,  the 
latter. 

3  This  is  the  case  with  regard  to  Cohn  (see  e.g.  §  107),  who  declines  to 
discuss  the  question  of  state  property,  as  being  economic  rather  than  financial. 


CHAP.  I.]   PUBLIC  REVENUES  :  FORMS  AND  CLASSIFICATION.    145 

§  3.  First,  it  is  abundantly  established  that  much  of  the 
difficulty  of  classification  arises  from  the  historical  pecu- 
liarities of  different  countries.  The  whole  doctrine  of  the 
regalia  is  an  instance  in  point.  It  was  the  result  of  attempt- 
ing to  apply  the  special  German  forms  of  revenue,  due 
in  part  to  rudeness  of  the  financial  system,  as  general 
categories  suited  for  all  times  and  places.  A  particular 
kind  of  state  rights  was  opposed  to  the  general  state  right 
to  raise  funds  of  which  it  was  but  one  part 

A  second  result  of  the  discussions  on  arrangement  is  that 
the  many  and  varied  shapes  of  public  revenue  do  not 
always  admit  of  sharp  and  clear-cut  divisions.  Just  as  in 
Economics  we  pass  by  a  series  of  steps  from  the  purest 
form  of  productive  capital  to  what  could  not  by  any  strain- 
ing of  terms  be  regarded  as  such,  so  do  we  find  many 
transitional  forms  between  what  is  the  State's  private  in- 
come and  what  it  gains  by  pure  taxation.  The  attempt 
to  create  a  co-ordinate  class  composed  of  'fees'  parallel  to- 
taxes  is  the  outcome  of  this  circumstance,  as  also  of  the 
want  of  analytic  power  in  the  originator  of  the  classifica- 
tion. If  Rau  had  recognised  the  frequent  combination  of 
the  double  elements  of  state  industry  and  taxation  under 
an  apparently  simple  and  independent  form  of  revenue  he 
would  have  aimed  at  separating  and  assigning  to  its  proper 
place  each  of  those  elements,  while  he  duly  noted  the  inter- 
mediate forms  that  presented  most  difficulty.  The  depart- 
ment of  fees  or  Gebilhren  at  one  end  touched  the  private 
income  of  the  State  and  at  the  other  (as  in  the  case  of 
'  taxes  on  commerce ')  the  field  of  taxation,  but  it  has  no 
central  point  possessing  well-assigned  and  definite  features 
and  enabling  us  to  give  a  definition  that  is  at  once  rational 
and  useful  in  practice. 

A  third  conclusion  is  also  warranted,  viz.  that  it  is  easy 
to  overrate  the  value  of  very  precise  and  correct  classifica- 
tion. We  need  not  deny  that  a  good  and  natural  grouping 
(i.e.  a  grouping  in  accordance  with  the  real  affinities  of  the 
objects)  is  very  helpful  both  for  exposition  and  investigation. 

L 


146  PUBLIC    FINANCE.  [BOOK  II. 

Features  of  resemblance  and  of  contrast  are  in  this  mode 
most  easily  perceived,  and  new  and  hitherto  neglected 
relations  are  often  suggested ;  but  notwithstanding  these 
undeniable  advantages,  the  most  essential  matter  after  all 
is  to  give  adequate  and  proper  treatment  to  the  material  of 
study,  and  even  with  a  somewhat  faulty  arrangement  this 
end  can  be  attained.  And  not  only  so,  the  merits  of 
any  particular  classification  depend  partly  on  the  end  in 
view.  In  a  purely  historical  inquiry  the  class  of  regalia  is 
entitled  to  a  prominence  to  which  it  has  no  claim  were  a 
scientific  exposition  of  principles  most  desired.  So  in 
descriptive  and  statistical  works  the  terms  and  divisions 
adopted  by  positive  financial  legislation  have  to  be  followed, 
subject  to  whatever  qualifications  scientific  arrangement 
may  necessitate.  In  an  investigation  of  general  Finance, 
the  grouping  of  topics  ought  to  be  based  on  the  underlying 
economic  and  social  conditions  and  aim  at  bringing  out 
their  relations  as  clearly  as  possible  *.  Besides,  different 
arrangements  naturally  tend  to  place  different  parts  of  the 
subject  in  prominence,  and  thus  study  of  a  new,  even  if  on 
the  whole  inferior,  system  of  grouping  will  suggest  novel 
points  of  view  to  the  inquirer. 

§  4.  We  have  already  shown  in  the  preceding  criticisms  the 
arrangement  that  appears  to  be  best.  It  has  now  to  be 
more  fully  stated.  The  widest  division  of  public  revenue 
is  into  (i)  that  obtained  by  the  State  in  its  various  functions 
as  a  great  corporation  or  'juristic  person'  operating  under 
the  ordinary  conditions  that  govern  individuals  or  private 
companies,  and  (2)  that  taken  from  the  revenues  of  the  society 
by  the  power  of  the  sovereign.  To  the  former  class  belong 
the  rents  received  by  the  State  as  landlord,  rent-charges  due 
to  it,  interest  on  capital  lent  by  it,  the  earnings  of  its  various 
employments  whether  these  cover  the  expenses  of  the 

1  Cp.  Wagner,  i.  474-5.  For  the  regalia  cp.  Sax :  '  Die  Regalien  gehoren 
der  Wirthschaftsgeschichte  und  dem  positiven  offentlichen  Kechte  an,  die 
volkswirthschaftliche  Theorie  .  .  .  hat  mit  ihnen  nichts  zu  schaffenj  Staats- 
ivirthschaft,  480. 


CHAP.  I.]    PUBLIC  REVENUES  I  FORMS  AND  CLASSIFICATION.    147 

particular  function  or  not,  and  finally  the  accrual  of  property 
by  escheat  or  absence  of  a  visible  owner.  Under  the  second 
class  have  to  be  placed  taxes,  either  general  or  special, 
and  finally  all  extra  returns  obtained  by  state  industrial 
agencies  through  the  privileges  granted  to  them.  This 
method  seems  best  to  satisfy  the  conditions  of  scientific 
accuracy  and  practical  convenience.  It  places  together 
distinct  and  well-defined  parts  of  public  revenue,  and  it 
separates  the  economic  from  the  compulsory  receipts  of  the 
State. 

To  test  it  in  its  relation  to  other  divisions  we  may  con- 
sider the  place  it  assigns  to  (i)  the  prerogative  dues,  and 
(2)  '  fees.'  If  these  classes  can  be  fittingly  placed,  then  the 
arrangement  may  be  said  to  be  justified.  A  very  slight 
examination  shows  that  many,  if  not  most  of  the  preroga- 
tives or  regalia  are  really  special  property-rights.  Roscher 
has  noticed  that  they  originated  in  the  mixture  of  landed 
property  and  sovereignty  1.  They  are  thus  in  their  right 
place  when  classed  along  with  other  economic  sources  of 
revenue.  In  some  instances,  however,  an  element  of 
monopoly  created  by  law  comes  in,  and  where  there  is  an 
additional  receipt  from  this  condition  it  is  certainly  a  tax 
and  must  find  its  place  in  the  compulsory  revenue  of  the 
State. 

Fees  admit  of  a  somewhat  similar  analysis.  Usually 
they  are  but  a  small  return  for  the  expenses  of  the  state 
agency  to  which  they  are  paid,  and  find  a  position  among 
the  private  economic  receipts  as  a  deduction  from  the 
expenditure.  It  may  even  be  best  to  deduct  them  from 
the  expenses  and  charge  the  balance  as  net  outlay,  though 
in  practice  the  wisdom  of  bringing  all  expenditure  and 
receipts  (not  merely  balances)  into  the  Budget  is  well- 
established.  In  some  cases  it  happens  that  fees  just  cover 
all  expenses,  and  then  the  public  office  or  agency  is  a  state- 
industry  that  pays  its  way.  Up  to  the  point  at  which 
ordinary  profit  is  obtained  the  same  title  is  justified,  but 

1  f  18. 
L  2 


148  PUBLIC    FINANCE.  [BOOK  II. 

when  (the  institution  being  exclusively  a  public  one) 
ordinary  profit  is  exceeded,  the  monopoly  possessed  by  the 
office  is  employed  for  taxation.  It  therefore  follows — and 
this  is  perhaps  the  greatest  difficulty  that  our  classification 
raises — that  one  and  the  same  public  institution  may  occupy 
different  positions  in  this  respect  at  different  places  or 
times.  The  Post  Office,  for  example,  may  be  a  purely 
public  function  involving  expenditure,  as  the  earliest  govern- 
ment Posts  probably  did  ;  it  may  in  another  country  or  at 
a  later  time  just  cover  its  expenses,  or  even  pay  fair 
interest  on  whatever  capital  it  employs, — such  has  been 
at  times  the  position  of  the  United  States  Post, — or,  lastly, 
it  may,  as  in  England  at  present,  give  a  large  surplus  to  the 
general  revenue,  when  its  charges  become  a  tax  on  com- 
munications, though,  as  we  shall  see,  sometimes  admitting 
of  full  justification.  In  truth,  this  apparent  defect  is  a 
reason  in  favour  of  our  grouping  of  the  forms  of  revenue. 
Such  institutions  as  the  Post  Office  are  in  this  respect 
different  in  different  countries,  but  in  all,  they  are  capable 
of  presenting  the  three  elements  of  expenditure,  industrial 
revenue,  and  tax  revenue.  In  treating  of  economic  ex- 
penditure we  have  already  noticed  the  first  aspect l ;  in  the 
present  book,  we  shall  consider  the  second,  reserving  the 
last  for  its  appropriate  place. 

Some  classes  of  fees,  e.g.  law  fees,  are  closely  connected 
with  the  primary  functions  of  the  State.  They  then 
approach  so  nearly  to  taxation  as  to  be  best  classed  with 
it.  There  is  an  appearance  of  straining  the  conception  of 
state  industry  by  including  them  under  that  head.  Here 
acquaintance  with  the  historical  development  is  of  use  in 
establishing  that  in  their  origin  such  fees  were  strictly 
payment  for  service  done,  and  even  when  this  element  has 
been  obscured  by  the  increase  of  state  power,  it  gives  place 
to  that  of  special  as  opposed  to  general  advantage,  a 
distinction  on  which  so  much  of  local  taxation  turns, 

1  Bk.  i.  ch.  6.  §  2. 


CHAP.  I.]   PUBLIC  REVENUES  :    FORMS  AND  CLASSIFICATION.    149 

and    which   can   be   applied    to   the   class   of   fees   under 
consideration. 

§  5.  So  much  suffices  at  present  with  reference  to  the 
general  classification  of  public  revenues.  We  have  now  to 
arrange  the  sub-divisions  of  the  public  '  economic '  income 
in  their  natural  order.  The  great  importance  of  this  part 
of  the  receipts  in  less  developed  societies  made  it  a  subject 
of  greater  attention  formerly  than  it  is  now,  and  led  to 
those  long  lists  of  the  heads  of  revenue  above  referred  to. 
The  modern  student  of  Finance  gains  little  from  these 
enumerations,  made  in  all  cases  from  the  legal  or  adminis- 
trative point  of  view,  but  he  is  impressed  by  the  fact  that 
such  receipts  are  regarded  as  the  '  ordinary  '  revenue  of  the 
State,  taxation  being  merely  an  occasional  resource.  This  idea 
survives  in  Blackstone's  chapter  on  '  The  King's  Revenue,' 
where  the  tax  revenue  is  regarded  as  '  extraordinary.' 
Even  such  recent  writers  as  Mr.  Dicey  have  to  notice  this 
division,  and  the  fact  that  the  change  in  circumstances  has 
made  the  old  terms  seem  incongruous  l.  A  classification 
of  the  quasi-private  funds  of  the  State  must,  it  would  seem, 
have  to  follow  the  lines  of  the  analysis  of  individual  incomes 
made  by  economic  science.  One  of  the  most  valuable  of 
Adam  Smith's  investigations  was  that  presented  in  his 
chapter  on  '  the  component  parts  of  the  price  of  commo- 
dities '  since  it  not  only  gave  a  starting  point  for  all  later 
analyses  of  cost  of  production,  but  it  afforded  in  outline  a 
scheme  of  economic  distribution,  and  it  is  on  it  that  the 
discussion  of  taxation  in  the  Wealth  of  Nations  is  based. 
Its  main  point  consists  in  showing  that  all  incomes  can  be 
separated  and  referred  to  one  or  more  of  the  three  cate-^ 
gories  of  rent — the  return  on  natural  agents  ;  wages — the 
reward  of  labour ;  and  profit — the  gain  on  capital.  The 

1  For  the  view  of  taxation  as  an  occasional  resource,  Neumann,  Progressive 
Einkommensteuer,  i,  2,  and  the  references  there  given.  Also  Blackstone. 
Bk.  i.  ch.  8,  and  contrast  Mr.  Dicey's  view.  '  We  may  therefore,  putting 
the  hereditary  revenue  out  of  our  minds,  direct  our  whole  attention  to  what 
is  oddly  enough  called  the  extraordinary,  but  is  in  reality  the  ordinary  or 
Parliamentary  revenue  of  the  nation,'  Law  of  the  Constitution  (ist  ed.),  316. 


150  PUBLIC   FINANCE.  [BOOK  II. 

State's  economic  revenue  must  be  capable  of  being  put 
under  the  same  heads,  but  the  general  doctrine,  as  it  appears 
in  the  work  of  its  originator1,  requires  two  corrections 
before  we  can  use  it  in  this  connexion  :  for  firstly,  the 
massing  together  of  the  interest  on  capital  and  the  earnings 
made  by  its  productive  use  is  now  perceived  to  be  in- 
accurate. The  function  of  the  capitalist  is  distinct  from 
that  of  the  'undertaker'  or  'employer/  and  is  so  dis- 
tinguished in  all  later  economic  work  2.  Another  correction 
is  needed  for  the  present  application.  The  category  of 
'  wages '  cannot  enter  into  the  public  receipts ;  the  State 
often  pays  but  never  receives  a  reward  for  labour.  Any 
apparent  exceptions  really  come  under  the  head  of  '  under- 
taking '  or  '  management '  of  industry.  We  thus  get  three 
broad  divisions  of  the  public  industrial  revenues,  viz.  (i) 
the  receipts  of  administrations,  central  or  local,  from  rent 
of  land  or  similar  natural  agents  ;  (2) — and  this  is  obviously 
a  less  important  source — the  gains  of  the  State  as  capitalist 
or  lender  of  funds  ;  and  (3)  the  returns  to  the  industrial 
activities  of  the  public  power.  Such  a  grouping  would 
appear  to  be  clear  and  logical,  but  it  needs  some  further 
modification  to  bring  it  more  into  accordance  with  the 
realities  of  actual  Finance.  Instead  of  confining  our  atten- 
tion to  the  State  as  a  landlord  in  receipt  of  rent,  we 
shall  find  it  more  convenient  to  consider  all  its  deal- 
ings with  its  agricultural  property,  whether  retained  in  its 
own  hands  or  let  out  to  tenants.  In  like  manner  the 
treatment  of  mines  may  most  suitably  be  placed  along 
with  the  state's  action  as  employer  or  undertaker  of  indus- 
trial operations.  Two  additional  topics  will  also  have  to 
be  brought  into  the  list.  The  many  and  various  fees  and 
dues  may  be  combined  with  the  rent-charges  and  other 

1  Though  the  analysis  can  be  traced  back  to  the  Physiocrats,  yet  Adam 
Smith  originated  its  form  and  applications. 

2  The  text-books  of  President  Walker,  Dr.  Sidgwick,  and  Prof.  Marshall 
are  instances.     The   separation  between  capitalist  and  entrepreneur  is  made 
both  by  J.  B.  Say  and  Rau. 


CHAP.  I.]   PUBLIC  REVENUES  I    FORMS  AND  CLASSIFICATION.    151 

settled  sums  payable  to  the  State,  and  also  with  the  interest 
on  loans  made  by  state  authorities,  the  whole  class  being 
connected  by  the  common  idea  of  fixed  payment,  that  is 
for  the  most  part  capable  of  capitalization.  And  finally 
to  the  revenue-yielding  industrial  domain  we  ought  to  add 
those  state  institutions  that  either  give  no  direct  returns, 
or  whose  expenses  may  exceed  any  receipts  that  they 
may  bring  in. 

In  short,  to  sum  up.  the  public  economic  revenue  may, 
partly  on  grounds  of  logical  arrangement,  partly  for  prac- 
tical convenience,  be  classed  into  (i)  returns  from  land. 
including  forests,  (2)  payments  which_ejther  represent^or 
^ajij:>eja>mrejte^ 

trative  revemie^^^n^H?!!!^^6^^6?^^  W- .^discussion 
of  those  industrial  forms  of  property  that  yield  not  revenue 
but  utility  in  a  less  distinctly  measurable  form. 


CHAPTER    II. 
THE  STATE  DOMAIN.    LANDS  AND  FORESTS. 

§  1.  THE  oldest  form  of  public  property  undoubtedly 
consists  of  the  territory  on  which  the  society  is  situated. 
There  is  a  great  body  of  evidence  to  show  that  communal 
holding  of  land  is  far  more  persistent  and  enduring  than 
other  kinds  of  common  enjoyment.  The  witness  of  history 
is  moreover  supported  by  all  the  probabilities  of  the  case. 
Until  agriculture  has  extended  and  improved  with  the 
growth  of  population  there  will  be  a  large  part  of  the 
tribal  land  lying  waste  or  only  used  for  pasture.  It  remains 
under  the  control  of  the  community  or,  at  a  later  time,  of 
the  chief.  Public  land  is  increased  by  the  action  of  war  ; 
the  land  of  the  vanquished  becomes  the  property  of  the 
conquerors  and  goes  to  swell  their  public  domain.  A 
counter-process  is  found  steadily  operating  in  the  allotment 
to  individuals  of  parts  of  the  domain.  The  Roman  ager 
publicus  dwindled  in  extent  under  this  influence  and  the 
territory  of  the  Provinces x — in  technical  law  the  property  of 
the  Commonwealth — was  *  possessed '  by  individuals  with 
the  substantial  rights  of  ownership.  A  public  domain  was 
notwithstanding  retained  and  some  of  the  local  revenue 
was  derived  from  the  letting  of  land,  though  largely  supple- 
mented by  other  sources.  The  earlier  Middle  Ages  regarded 
the  royal  domain  as  the  basis  of  public  income.  The 
Feudal  King  was  the  greatest  landholder  and  was  expected 
to  discharge  the  necessary  public  duties  by  aid  of  the 

1  Cp.  the  statement  of  Gains  '  Provincialia  praedia  iisucapionem  non  re- 
cipitmt? 


CHAP.  II.]      THE   STATE   DOMAIN.      LANDS   AND    FORESTS.       153 

revenue  that  he  obtained  from  that  source.  The  same 
opposing  forces  that  were  operative  in  earlier  times  affected 
the  royal  lands.  They  were  reduced  by  lavish  grants  to 
royal  favourites,  and  increased  by  resumptions  and  for- 
feitures. The  position  of  the  domain  depended  very  much 
on  the  strength  or  weakness  of  the  individual  monarch, 
improving  in  extent  during  vigorous  reigns  and  shrinking 
considerably  in  feeble  ones. 

The  later  history  of  the  domain  varied  in  detail  in  each 
European  country,  but  one  very  general  result  is  found  in 
the  transformation  of  what  had  been  the  King's  estate  into 
public  property.  In  the  few  cases  where  royal  or  princely 
estates  have  remained  in  the  possession  of  the  reigning 
family,  they  are  nevertheless,  in  substance,  public,  inasmuch 
as  they  supply  the  ruler's  official  income,  and  by  rewarding 
his  services  relieve  the  treasury  from  an  equivalent  charge  1. 

§  2.  The  disintegrating  forces  that  tended  to  break  up  the 
great  state  domains  as  well  as  the  other  parts  of  mediaeval 
Finance  did  not  everywhere  act  with  the  same  intensity. 
Owing  to  peculiarities  of  situation,  and  in  some  degree  to 
differences  of  policy,  the  proportion  of  state  domain  is 
at  present  hardly  the  same  in  any  two  countries.  England 
is  remarkable  for  the  almost  complete  alienation  of  its 
Crown  lands,  the  revenue  derived  from  that  source  being 
one  of  the  most  insignificant  in  the  budget  of  receipts2. 
*  It  was  in  the  fifteenth  century  that,'  according  to  Thorold 
Rogers,  '  the  great  impoverishment  of  the  Crown  estate 

1  The  distinction  between  the  property  of  the  ruler  as  a  private  person, 
and  that  which  accompanies  his  office  is  now  of  little  interest.  It  was 
emphasized  in  the  Roman  Empire — res  privatae  opposed  to  res  fiscales — 
(Humbert,  i.  187  sq),  and  was  of  much  importance  in  Germany  in  the  case 
of  mediatised  princes,  who  naturally  tried  to  stretch  the  private  element  as 
far  as  possible.  In  practice  the  same  end  is  reached  by  different  means  in 
modern  Stales,  as  in  the  cases  of  Baden  and  Wurtemberg,  noted  by  Roscher, 

§9- 

8  The  net  receipts  in  the  year  1888-9  were  ^430,000,  the  gross  ^£506,828,  or 
less  than  £  per  cent,  of  the  total  (^88,472,855).  The  revenues  of  the  duchies 
of  Lancaster  and  Cornwall  should  in  strictness  be  added  with  a  corresponding 
item  of  expenditure  for  the  sovereign's  support,  Bk.  i.  ch.  6.  §  5. 


154  PUBLIC    FINANCE.  [BOOK  II. 

began,'  and  though  increased  by  the  dissolution  of  the 
monasteries  by  Henry  VIII,  it  was  again  reduced  by  his 
successors  until  it  reached  its  present  position  at  the  com- 
mencement of  the  eighteenth  century x.  In  France  there 
has  been  also  a  series  of  losses  which  has  reduced  the 
public  lands  held  by  the  central  government  to  a  very 
small  amount,  with  the  exception  of  forests,  of  which  it 
possesses  1,070,477  hectares  (about  2,650,000  acres).  There 
is,  however,  a  remarkable  difference  as  compared  with 
England  in  the  large  quantity  of  land  held  by  the  Com- 
munes or  local  units.  These  bodies  in  1877  had  2,058,707 
hectares  (or,  in  round  numbers,  5,000,000  acres)  of  forests 
and  2,258,310  hectares  (or  5.600,000  acres)  of  other  land, 
most  of  it  being  of  very  poor  quality.  The  productiveness, 
however,  as  distinguished  from  the  extent  of  this  property, 
is  not  considerable;  in  1877  the  receipts  from  communal 
goods,  including  other  items  than  land,  was  only  51,702,694 
francs,  or  little  over  £2,000,000,  and  showing  less  than 
£40,000  increase  since  1862.  These  figures  need  some 
further  correction,  since  a  large  amount  of  communal  land 
has  been  sold  and  in  some  cases  timber  has  been  freely 
cut  down.  Thus  in  1877  over  24!  million  francs  were 
obtained  from  those  extraordinary  resources  that  had  for 
the  earlier  year  1862  yielded  over  34  million  francs.  It 
accordingly  appears  that  a  sum  of  about  £3,000,000  was 
the  contribution  from  immovable  property  for  1877  towards 
a  total  communal  expenditure  of  about  £27,000.000  a.  It 
is  plain  that  neither  England  nor  France  can  hope  for 
much  financial  advantage  from  public  lands,  either  general 
or  local.  The  policy,  or  at  all  events,  the  desire  of  aliena- 
tion has  been  too  strong,  as  the  speedy  disposal  of  the 
confiscated  estates  of  the  clergy  and  the  emigrant  noblesse 
shows  in  regard  to  France  3.  Nor  are  the  cases  of  Italy  and 

1  Economic  Interpretation  of  History,  417  sq. 

2  Say,  Dictionnaire  des  Finances,  s.  v.  '  Budget  Communal.' 

3  The  most  careful  estimates  place  the  amount  of  immovables  disposed  of 
during  the  revolutionary  period  at  £220,000,000,  i.  e.  £120,000,000  for  Church 
and  Crown  lands,  £100,000,000  for  those  of  the  emigres.     Stourm,  li.  461. 


CHAP.  II.]      THE    STATE    DOMAIN.       LANDS   AND    FORESTS.       155 

Spain  substantially  different.  The  heavy  expenditure  that 
the  unification  of  Italy  necessitated  was  partly  met  by  sale  of 
the  state  lands,  and  at  a  later  time  by  confiscation  and  sale 
of  the  possessions  of  the  ecclesiastical  bodies  so  numerous 
in  that  country.  By  1886  over  ^33,ooo,,ooo  had  been 
realized  through  those  sales,  and  by  far  the  greater  part  of 
the  lands  had  been  disposed  of. 

The  countries  of  Eastern  Europe  are  differently  situated. 
Germany,  Austria,  and  Russia  all  possess  large  public 
estates — a  circumstance  that  may  be  fully  explained  by 
the  later  growth  of  constitutional  government  in  the  former 
and  its  absence  as  yet  in  the  last  named.  A  State  that 
cannot  rely  on  taxation  as  a  resource  at  need  must  provide 
other  financial  support,  and  taxation  is  productive  only  on 
the  condition  of  general  willingness  to  contribute.  States, 
therefore,  in  which  royal  power  has  not  been  completely  dis- 
placed by  popular  government  will  probably  retain  a  larger 
amount  of  public  land.  The  position  of  Prussia  illustrates 
this  proposition.  The  budget  estimate  for  1889-90  gives 
a  gross  receipt  of  87,000,000  marks,  and  after  allowing  for 
the  working  expenses  of  nearly  40,000,000  marks,  there  is 
a  net  revenue  of  about  47,000,000  marks,  or  £2, 350,000. 
The  Bavarian  domains  are,  in  proportion,  larger  and  more 
valuable  than  those  of  Prussia.  The  biennial  budget  esti- 
mated the  yield  for  each  of  the  years  1888  and  1889  at 
33>5OO5OO°  marks.  Wiirtemberg,  Baden,  and  Saxony  also 
have  large  domains,  chiefly  forests. 

Austria  and  Hungary  have  each  state  lands  and  forests, 
the  estimated  revenue  in  the  former  country  from  that  source 
being  over  4,000,000  florins,  and  in  the  latter  2,500,000 
florins l.  Russia  is  a  more  remarkable  case  :  it  illustrates  the 
statement  that  the  less  the  development  of  the  society  the 
greater  is  the  proportion  of  public  land.  At  the  time  of 
the  great  reform  usually  known  as  the  emancipation  of 
the  serfs  an  amount,  estimated  at  from  two-fifths  to  one- 

1  The  estimate  for  the  Austrian  domains  and  forests  for  1891  was  less  than 
500,000  florins  (net  revenue). 


156  PUBLIC    FINANCE.  [BOOK  II. 

half  of  the  land  of  Russia  was  held  by  the  State.  About 
eighty  years  earlier  10,500,000  serfs  were  found  on  the 
state  lands,  and  in  1861  this  number  had  increased  to 
23,000,000.  The  measures  of  emancipation— so  far  as  the 
state  domain  was  concerned — consisted  in  a  re-adjustment 
of  the  dues  that  were  payable  which  henceforth,  in  many 
cases,  assumed  the  form  of  taxation  either  imperial  or  local. 
Economic  inquiries  are  said  to  show  that  rent  has  been 
evolved  from  taxation,  but  it  is  equally  true  that  in  many 
cases  taxation  has  passed  into  rent,  or  rent-charge.  In 
some  parts  of  Russia  the  state  charges  on  the  former 
imperial  serfs  are  higher  than  an  economic  rent,  in  others 
they  are  lower,  and  in  the  latter  case  they  may  be  looked 
on  either  as  a  reserved  property  or  as  a  land  tax.  It 
appears  in  this  way  that  the  income  of  the  State  as  land- 
owner may  approach  very  closely  to  the  tax  revenue  that 
is  imposed  on  land,  and  that  the  line  of  separation  can  only 
be  fixed  with  reference  to  all  the  circumstances  of  each 
particular  case.  In  addition  to  this  wider  form  of  state 
domain  the  Russian  government  received,  in  the  year  1888, 
nearly  25,000,000  roubles  from  lands  and  forests,  though 
the  expenditure  on  the  same  objects  has  to  be  deducted  to 
arrive  at  the  net  gain l. 

The  Indian  land  tenures  present  the  same  features  even 
more  forcibly.  Under  all  the  varying  forms  of  assessment 
the  principle  that  the  State  is  ultimate  owner  has  not  been, 
in  practice,  completely  lost  sight  of,  except  in  the  settlement 
of  Bengal.  Nothing  appears  more  equitable  than  that  this 
head  proprietor  should  receive  a  share  of  the  increasing 
value  of  the  soil.  On  the  other  hand,  the  machinery  of 
assessment  and  collection  is  compulsory  ;  it  is  far  more 
akin  to  the  processes  of  the  tax-collector  than  of  the  land- 
lord, and  the  difficulty  recurs  of  saying  whether  the  receipts 
are  taxes  or  rent.  The  best  solution  of  this  question  is 
arrived  at  when  we  see  that  in  strictness  they  belong  to 
neither  class.  They  differ  most  markedly  from  the  rent, 

1  For  the  position  of  the  state  serfs,  see  Wallace,  Russia,  105,  473,  553. 


CHAP.  II.]      THE    STATE    DOMAIN.       LANDS   AND   FORESTS.       157 

either  customary  or  competitive,  of  a  modern  landowner, 
and  more  nearly  resemble  the  dues  of  the  feudal  lord. 
They  are  just  as  distinct  from  the  ordinary  tax,  and  are  not 
governed  by  the  canons  to  which  it  ought  to  conform ;  at 
the  utmost  they  might  be  assimilated  with  the  taxes  on 
special  advantages  or  monopolies,  of  which  class  the  posses- 
sion of  land  is  one  example.  Where  the  state  dues  are 
frequently  revised  in  accordance  with  the  movement  of 
land  values  the  approximation  to  rent  is  very  close  ;  where 
they  are  changed  in  order  to  suit  the  needs  of  the  State 
they  are  practically  taxation l ;  but  where,  as  is  most 
common,  they  are  fixed  for  long  periods,  or  in  perpetuity, 
they  are  really  charges  that  may  be  capitalized  at  the 
market  rate  of  interest.  The  Indian  Land  Tax  with  its 
great  net  return  of  nearly  £20,000,000,  has,  at  different 
times  and  in  different  provinces,  shown  each  of  the  three 
features,  but  on  the  whole  the  rent-charge  element  has  pre- 
ponderated over  the  others.  The  lengthening  of  the  period 
of  settlement,  and  the  disposition  to  keep  the  assessment 
under  the  value,  have  both  tended  to  this  end. 

§  3.  European  colonies  and  more  particularly  the  Eng- 
lish settlements  in  North  America  and  Australasia  contrast 
remarkably  with  the  preceding  cases.  The  most  prominent 
economic  features  in  a  new  country  are  abundance  of  land 
with  scarcity  both  of  labour  and  capital ;  land  is  conse- 
quently the  cheapest  of  commodities,,  so  much  so  that  it 
is  freely  offered  in  full  ownership  as  an  inducement  to 
fresh  settlers.  The  progress  of  cultivation  soon  changes 
this  state  of  things.  The  more  fertile  land  is  taken  up,  and 
acquires  value  from  the  growth  of  population.  At  first  sight 
it  seems  that  the  State  might  derive  important  resources 
from  a  reserved  charge  on  its  land,  or,  by  adopting  the 
simple  expedient  of  leasing  it  out  instead  of  giving  it  away, 

1  *  It  seems  to  me  that  the  distinction  between  a  tax  and  a  rent  is  merely 
a  matter  of  amount ;  and  that  if  a  land  tax  is  so  high  as  to  absorb  the  rent 
it  becomes  in  fact  rent,'  Campbell  in  Cobden  Club  Essays  (1st  series),  130-1. 
Cp.  Marshall,  Principles,  68 1  n. 


158  PUBLIC    FINANCE.  [BOOK  II. 

would  obtain  a  share  of  the  increase  in  its  value.  The 
Wakefield  system,  though  not  designed  for  financial  ends, 
sought  to  secure  a  higher  capital  return  for  land  that  was 
sold,  at  the  same  time  applying  the  funds  so  derived  for 
the  promotion  of  immigration  ;  in  fact,  increasing  both 
colonial  receipts  and  expenditure.  The  advantages  of  free 
access  to  land  are  however  so  great  in  a  new  country ; 
the  effect  on  economic  development  of  a  speedy  growth  of 
population  is  so  considerable  and  so  easily  perceived,  that 
no  effectual  method  of  limiting  the  occupation  of  the  soil 
in  full  ownership  has  been  continued.  The  United  States, 
the  various  English  colonies,  and  the  South  American 
Republics  have  all  found  that  nothing  is  such  a  stimulus 
to  immigration  as  full  liberty  of  acquiring  vacant  land, 
For  this  reason  the  revenues  of  those  States  from  land  are 
comparatively  speaking  small,  and  for  obtaining  the  ne- 
cessary funds  recourse  must  be  had  to  other  forms, 
principally  indirect  taxation.  As  examples  it  appears 
that  in  1889  the  United  States  obtained  over  ;£  1,600,000 
by  the  sale  of  public  lands,  but  against  this  the  expenses 
on  the  same  account  have  to  be  set  off,  and  the  result 
seems  to  be  that  on  the  whole  there  is  a  loss  on  the  state 
lands  :  they  really  are  an  item  of  expenditure  not  of  re- 
ceipts1. For  the  financial  year  1886-7  the  Canadian  land 
receipts  were  a  little  over  .£40,000,  though  it  is  hoped  that 
in  future  years  the  return  will  be  greater.  In  the  same 
year  the  Australasian  colonies  received  over  ^"3,500,000, 
about  two-thirds  of  which  was  from  sales  and  the  remain- 
ing one-third  from  rents  on  leases  2.  Thus  neither  in  new  nor 
in  old  countries  are  the  lands  of  the  State  one  of  the  main 

1  '  Except  for  the  period  1830  to  1840  the  lands  have  been  a  drain  upon,  and 
not  a  resource  of  our  government/  Quarterly  Journal  of  Economics,  \,  174. 

2  The  precise  figures  are 

United  States  land  sales,  1888-9 ^,°^^^-^} 

Canada  land  revenue,  1886-7          .         .         .         .         .  $213,459 

Australasian  colonies,  1886-7,  sales        ....  £2,279,769 

ditto.  rents        .         .         ,         .  .£1,280,528 

ditto.  sales  and  rents  combined  £3,560,297 


CHAP.  II.]    THE   STATE   DOMAIN.      LANDS   AND    FORESTS.        159 

supports  of  the  financial  system.  It  requires  an  extra- 
ordinary combination  of  circumstances,  as  in  the  case  of 
India,  to  create  an  exception  to  this  general  rule. 

§  4.  The  apparent  advantages  of  a  large  state  revenue 
from  land  and  the  peculiar  nature  of  the  income  received 
from  the  use  of  superior  natural  agents  has  suggested  the 
advisability  of  dispossessing  all  private  owners  and  reverting 
to  the  primitive  system  of  public  ownership.  Whether 
under  the  name  of  rent  or  of  the  single  tax,  this  plan  of 
imposition  involves  the  confiscation  of  all  existing  rights 
in  land.  Its  bearings,  when  regarded  as  a  form  of  taxation, 
belong  to  the  theory  of  that  part  of  our  subject,  but  we 
may  notice  it  in  so  far  as  it  advocates  an  extension  of  state 
property.  And  here  there  is  an  evident  distinction  to  be 
made.  In  one  form  of  the  proposal,  existing  owners  are 
to  be  compensated,  when  it  simply  amounts  to  an  extension 
of  the  state  domains  by  purchase.  In  the  other  and  more 
drastic  form  no  compensation  is  to  be  allowed.  Owners  of 
land,  no  matter  how  acquired,  are  to  be  compelled  to  sur- 
render their  incomes  from  this  source  to  the  State.  It  is 
not  necessary  to  characterize  the  morality  of  this  scheme, 
but  its  financial  attractiveness,  at  first  sight  great,  is  much 
diminished  on  closer  examination.  The  disturbance  of 
economic  relations  and  the  general  feeling  of  insecurity 
that  the  adoption  of  such  a  measure  would  produce,  even 
on  the  assumption  that  it  would  be  carried  into  effect  with- 
out a  revolution,  would  go  far  to  reduce  the  productiveness 
of  land  to  the  State,  and  to  lower  the  incomes  of  other  classes 
of  the  society  in  whose  interest  the  measure  is  advocated. 

The  proportion  of  land  revenue  to  the  total  receipts  in  each  of  the  last  men- 
tioned colonies  is  as  follows : — 

Western  Australia  26-87  Per  cent- 

New  South  Wales  21-65 

Queensland  21-25 

South  Australia  n-50 

Tasmania  10-99 

New  Zealand  9-17 

Victoria  8-72 

Average  14-98 


l6o  PUBLIC    FINANCE.  [BOOK  II. 

In  another  way,  too,  the  gain  would  be  reduced.  The  large 
amount  of  general  and  local  taxation  at  present  raised  from 
land,  as  also  the  necessary  expenditure  for  keeping  it  in 
proper  condition,  must  be  deducted  before  the  net  advantage 
to  the  Exchequer  can  be  known.  Besides,  all  the  difficul- 
ties attendant  on  state  management  of  land  would  exist  in 
at  least  equal  strength  if  it  were  acquired  without  paying 
its  fair  value l. 

§  5.  From  these  far-reaching  and  unsafe  theoretical  plans 
we  may  now  turn  to  the  actual  questions  connected  with 
the  public  ownership  of  land.  They  are  divided  into 
two  groups,  the  first  of  which  considers  the  advisability  of 
the  State  retaining  its  domains,  and  the  second,  taking  the 
retention  as  desirable,  investigates  the  best  methods  of  ad- 
ministration. As  the  former  comprises  the  already  noticed 
question  of  land  nationalization  with  full  compensation,  we 
shall  find  it  convenient  to  commence  with  it. 

At  the  opening  of  scientific  economic  inquiry  the  treatment 
of  state  lands  was  a  subject  for  discussion.  German  writers 
e.g.  Justi,  favoured  their  retention  as  being  a  better  source 
of  income  than  taxation,  but  the  tendency  of  the  new  doc- 
trines of  the  Physiocrats  and  Adam  Smith  were  in  the 
opposite  direction.  Taxation  in  the  form  of  a  direct 
charge  on  the  net  revenue  of  land  was  regarded  by  the 
former  as  the  proper  support  of  the  State,  and  the  latter 
has  unequivocally  pronounced  in  favour  of  the  alienation  of 
the  public  domain.  '  The  revenue  which  in  any  civilized 
monarchy  the  Crown  derives  from  the  crown  lands,  though 
it  appears  to  cost  nothing  to  individuals,  in  reality  costs 
more  to  the  society  than  perhaps  any  other  equal  revenue 
which  the  crown  enjoys.  It  would  in  all  cases  be  for  the 
interest  of  the  society  to  replace  this  revenue  to  the  Crown 
by  some  other  equal  revenue,  and  to  divide  the  lands  among 

1  The  idea  of  state  ownership  of  land,  based  on  an  application  of  the  economic 
theory  of  rent,  first  appears  in  James  Mill's  Elements.  He  was  probably  led  to 
it  by  his  study  of  India.  J.  S.  Mill,  in  the  later  years  of  his  life,  maintained 
a  like  opinion,  which  in  recent  years  has  been  urged  with  much  enthusiasm  by 
Mr.  Henry  George,  and  in  Australia  by  Mr.  Syme. 


CHAP.  II.]   THE   STATE    DOMAIN.      LANDS   AND    FORESTS.        l6l 

the  people,  which  could  not  well  be  done  better  perhaps 
than  by  exposing  them  to  public  sale1.' 

The  reasons  given  in  favour  of  this  policy  are  clear  and 
simple.  Firstly,  the  lands  held  by  the  State  are  managed 
so  badly  that  the  revenue  of  the  society  would  be  increased 
by  their  alienation,  since  the  produce  obtained  from  them 
would  be  larger.  The  price  obtained  by  the  government 
would  go  to  discharge  liabilities,  and  therefore  the  amount 
of  receipts,  if  not  larger,  would  certainly  not  be  less ;  and, 
finally,  the  improvement  of  the  alienated  lands,  under  the 
management  of  private  individuals,  would  by  adding  to 
the  source  from  which  taxes  are  drawn,  make  their 
yield  greater.  The  case  as  so  presented  is  a  strong  one, 
and,  in  the  main,  convincing.  Nevertheless,  the  German 
writers  on  Finance  have  regarded  this  view  of  Adam 
Smith's  as  one-sided  and  exaggerated.  His  condemna- 
tion of  state  property  is,  it  is  said,  too  absolute,  and  various 
arguments  in  favour  of  the  retention  of  state  domains  have 
been  put  forward.  Thus,  the  advantage  of  such  property 
as  a  security  for  public  loans  is  suggested  as  a  reason  for 
their  retention  ;  also  the  advantage  of  model  estates  on 
which  improvements  may  be  introduced  as  a  means  of 
instruction  to  agriculturists.  The  political  gain  to  the 
Crown  from  possessing  an  independent  source  of  income, 
and,  too,  the  prospect  of  the  value  and  return  of  land  in- 
creasing through  the  progress  of  society  are  given  as  further 
reasons  in  favour  of  retention.  Most  of  these  pleas  are 
unfounded:  if  public  lands  are  a  security  for  loans  their 
sale  would  prevent  the  need  of  borrowing.  The  royal 
income  is  just  as  secure  when  settled  on  the  civil  list  ;  no 
matter  what  be  its  form  a  revolution  will  disturb  it.  The 
value  of  model  estates  is  a  distinct  and  separate  question, 


1  347a.  cp.  the  opinion  of  Burke  '  A  landed  estate  is  certainly  the  very  worst 
which  the  Crown  can  possess.  All  minute  and  dispersed  possessions,  .  .  .  which 
require  a  continued  personal  attendance  are  of  a  nature  more  proper  for  private 
management  than  public  administration.'  '  Speech  on  Economical  Reform ' 
(1780),  Works,  ii.  79. 

M 


l62  PUBLIC    FINANCE.  [BOOK  IT. 

and  belongs  rather  to  expenditure  than  to  revenue,  so  that 
the  only  valid  argument  remaining  is  that  derived  from  the 
growth  of  rent  or  unearned  increment.  The  question,  how- 
ever, remains,  whether  this  very  growth  is  not  in  great 
measure  due  to  the  incentive  that  private  ownership  of 
land  gives,  and  which  is  removed  by  state  occupation. 
Still  it  must  be  admitted  that  in  the  case  more  especially 
of  land  suited  by  position  for  building  sites  there  is  a 
decided  advantage  in  reserving  the  constant  increments  of 
rent  for  public  use  ;  and  that  any  equitable  mode  of  accom- 
plishing this  end  is  deserving  of  approval.  The  retention 
of  state  or  crown  lands  is  of  itself  by  no  means  sufficient 
for  the  purpose.  Even  in  Germany  or  Russia  the  proportion 
of  public  land  really  at  the  full  disposal  of  the  State  is  only 
a  fraction  of  the  whole,  and  the  part  of  it  that  is  situated 
within  urban  districts  is  much  smaller,  so  that  it  appears 
that  under  actual  conditions  the  difficult  question  of  un- 
earned increment  in  connexion  with  ground  rents  must  be 
solved,  if  solved  at  all,  by  special  taxation.  The  contention 
of  Adam  Smith  therefore  holds  good,  that  in  general,  from  a 
purely  financial  point  of  view,  the  sale  of  lands  in  order  to 
clear  off  debt  or  meet  extraordinary  expenditure  is  expe- 
dient. Underlying  the  discussion  in  the  Wealth  of  Nations 
there  are,  it  should  be  noticed,  some  assumed  conditions  that 
did  really  correspond  to  the  facts  in  Adam  Smith's  time. 
These  are  (i)  the  existence  of  debt  on  the  part  of  the  State. 
While  it  is  financially  wise  to  dispose  of  property  yielding 
small  returns  to  meet  obligations  paying  a  high  rate  of 
interest,  it  is  not  equally  clear  that  alienation  of  property 
to  meet  current  expenditure  is  justifiable.  Expenditure  of 
the  normal  kind  should  be  met  by  equally  normal  receipts, 
and  the  sale  of  land  is  not  of  this  nature  *.  Unfortunately, 
the  case  is  rather  conceivable  than  actually  existent,  as  every 

1  The  Australasian  colonies,  incorrectly  as  it  seems,  place  sales  of  land 
among  current  receipts,  a  partial  exception  is  found  in  Victoria,  where  a  small 
sum  is  carried  to  the  Railway  Construction  Account,  Victorian  Year-Book 
(1887-8),  i.  140. 


CHAP.  II.]   THE   STATE    DOMAIN.      LANDS   AND    FORESTS.        163 

country  has  its  public  debts  to  a  larger  amount  than  the  sale 
of  its  domains  would  meet.  (2)  The  expediency  of  selling 
the  state  domain  also  depends  on  the  available  market.  In 
most  European  States  in  the  eighteenth  century  there  was 
no  difficulty  in  finding  an  open  market  for  the  amount  of 
land  held  by  the  sovereigns.  But  under  other  circum- 
stances it  would  be  hopeless  to  expect  that  large  masses  of 
land  could  be  sold  at  their  normal  value  owing  to  want  of 
capital  and  enterprise  on  the  part  of  individuals.  Such  is 
plainly  the  position  of  India  in  those  cases  where  the  land 
tax  is  really  a  rent l.  In  addition  to  the  political  and 
social  evils  there  would  almost  certainly  be  a  financial  loss 
from  forced  sales.  The  same  statement  would  hold  good 
for  all  new  countries  where  the  sale  of  land  depends  on 
the  demand  of  fresh  settlers,  and  where  the  amount  dis- 
posable in  any  one  year  is  limited. 

The  evident  conclusion  seems  to  be  that  the  function  of 
the  State  as  owner  of  agricultural  land  is  sure  to  decline  in 
importance  with  the  advance  of  society.  The  proportion 
of  the  quasi-private  income  of  the  State  to  tax  revenue 
becomes  smaller  in  the  course  of  time,  and  as  the  industrial 
domain  has  in  certain  directions  a  tendency  to  expand,  the 
falling  off  in  the  yield  from  rent  must  be  very  decided. 
Though  this  will  be  the  probable  final  result,  it  is  also  true 
that  for  a  long  period  the  management  of  state  lands  will 
be  of  practical  interest  in  some  countries,  and  will  always 
remain  as  a  problem  of  financial  science.  If  the  State, 
through  its  central  or  local  organs,  is  the  owner  of  landed 
property  it  is  desirable  that  property  so  held  should  be 
wisely  managed. 

§  6.  The  methods  of  administering  state  lands  may  be 
reduced  to  the  same  classes  as  those  existing  in  the  case  of 
a  large  private  owner.  As  in  the  latter  instance  the  estate 
may  be  worked  by  the  proprietor  or  let  out  to  tenants,  so 
may  public  property  be  either  directly  under  state  adminis- 

1  The  sale  of  fee- simple  estates  to  European  settlers  is  emphatically  one 
of  those  exceptions  that  prove  the  rule. 

M  2 


164  PUBLIC    FINANCE.  [BOOK  II. 

tration  or  be  leased  to  private  individuals.  The  former 
system  is  probably  the  earliest.  The  celebrated  capitulary 
of  Charlemagne,  entitled  de  villis,  contains  a  set  of  regula- 
tions for  the  management  of  his  manors,  and  in  Germany 
several  parallels  are  to  be  found  1,  but  the  same  influences 
that  caused  land-owners  to  abandon  farming  by  bailiffs 
affected  the  royal  estates.  A  direct  financial  gain  was 
procured  by  letting  the  lands  to  tenants.  To  work  effec- 
tively a  large  area  of  land  requires  a  good  deal  of  capital 
applied  with  intelligence,  under  diligent  supervision.  All 
these  conditions  were  wanting  in  public  or  royal  manage- 
ment, and  therefore  the  economic  advantages  of  the  tenancy 
system  were  so  great  as  to  be  easily  recognised.  The 
method  of  direct  state  administration  as  a  financial  policy 
has  no  supporters 2. 

The  dealings  of  the  State  with  agricultural  tenants  ought, 
it  is  plain,  to  be  modelled  on  the  system  of  a  prudent 
landlord.  There  is  no  possible  reason  why  .the  treatment 
of  state  domains  should  differ  from  that  applied  by  private 
owners  to  the  management  of  their  properties.  In  two 
respects,  indeed,  the  nature  of  the  public  power  has  peculi- 
arities that  affect  its  dealings  with  land.  It  is  of  longer 
duration  than  the  individual  owner,  and  it  has  necessarily 
to  act  through  agents.  A  result  of  the  former  is  the  possi- 
bility of  longer  agreements  and  a  more  continuous  policy  in 
the  system  adopted :  the  latter  makes  the  use  of  definite 
rules  desirable  to  prevent  corrupt  action  on  the  part  of 
officials.  Even  as  regards  these  special  features  there  is 
not  much  difference  between  the  state  property  and  those 
of  the  largest  class  of  English  owners  where  the  method  of 
estate  management  is  handed  on  unchanged  for  genera- 
tions, and  most  of  the  administrative  work  has  to  be  done 
by  paid  representatives3. 

1  Roscher,  §  n. 

2  Not  even  Wagner,  cp.  i.  540-1. 

3  An  interesting  description  of  estate  management  is  given  in  Escort's  Eng- 
land, ch.  3.      The  following  passage  bears  out  the  view  in   the  text,  '  The 
Crown  and  the  Ecclesiastical  Commissioners  are  at  the  present  moment  the 


CHAP.  II.]   THE   STATE    DOMAIN.      LANDS   AND    FORESTS.        165 

The  earliest  agricultural  tenants  are  probably  to  be 
found  in  the  serfs  who  cultivated  the  soil  and  paid  rents  in 
labour,  or  produce,  or  both.  The  advance  in  personal 
liberty  freed  these  cultivators  from  many  of  the  more 
degrading  incidents  of  their  tenure,  and  by  degrees  they 
became  established  as  free  tenants  paying  money  rents. 
In  another  way  a  larger  class  of  tenants  was  created. 
Officials  in  charge  of  land  were  bound  to  account  for 
a  certain  return,  the  surplus,  if  any,  going  to  them,  and 
this  function  of  collecting  dues  with  the  obligation  of 
giving  a  fixed  quota  to  the  sovereign,  became  in  many 
cases  tenancy,  passing  later  on  into  ownership. 

The  application  of  what  are  called  'commercial  principles' 
to  the  letting  of  land  is  of  comparatively  recent  introduc- 
tion, but  it  is  only  at  this  stage  that  the  idea  of  conscious 
choice  between  different  systems,  hitherto  followed  through 
the  blind  influence  of  custom,  comes  prominently  forward. 
Three  forms  of  tenure  are  possible,  viz.  tenancy  from  year 
to  year,  or  in  popular  language  'at  will,'  leases  for  years, 
and  heritable,  extending  to  perpetual,  leases.  The  first 
form  has  been  almost  universally  condemned,  though  under 
the  fair  and  impartial  guidance  of  a  public  department  it 
would  be  free  from  some  of  its  most  objectionable  aspects. 
The  undue  increase  of  rent  and  the  discouragement  to  im- 
provements characteristic  of  the  tenure  would  neither  of 
them  be  likely  to  happen  under  state  management.  Leases 
for  years  are,  however,  free  from  even  the  chance  of  such 
evils,  and  it  is  perhaps  wise  to  adopt  this  system,  as  other- 
wise the  example  of  the  public  estates  might  be  put  forward 
to  justify  the  conduct  of  private  owners  in  adhering  to 
yearly  tenancies.  The  exact  number  of  years  to  be  given 
in  the  state  leases  can  hardly  be  decided  on  general  prin- 
ciples. It  should  be  long  enough  to  give  full  room  for 

most  extensive  land  proprieters  in  England,  having  the  management  of  pro- 
perties with  a  rental  of  upwards  of  £400,000,  situated  in  all  parts  of  the  United 
Kingdom.  These  are  administered  upon  practically  the  same  principles  which 
obtain  in  the  cases  of  the  large  landed  nobility,'  37. 


l66  PUBLIC   FINANCE.  [BOOK  II. 

the  application  of  the  tenant's  industry  and  capital,  while 
in  the  interest  of  the  public  it  should  not  exceed  the  time 
during  which  a  large  increase  of  the  natural  value  of  the 
land  takes  place.  Provided  that  full  allowance  is  made  for 
the  tenant's  improvements,  thirty  years  seems  a  fair  term, 
and  sufficient  to  eliminate  the  effects  of  casual  disturbances. 
Older  than  leases  for  years  is  the  system  of  hereditary 
lease  (Erbpacht)  that  has  from  early  times  been  connected 
with  public  property.  The  emphyteusis — the  form  that 
it  takes  in  Roman  Law — was  originally  developed  on  the 
estates  of  municipalities,  and  in  the  Middle  Ages  ecclesias- 
tical bodies  were  foremost  in  granting  similar  tenures 1. 
The  advantages  to  a  corporation  of  obtaining  a  settled 
rent  without  the  trouble  of  supervision  and  calls  for 
expenditure  are  greater  than  in  the  case  of  a  single  owner 
who  hopes  to  gain  extra  rent  by  his  attention  and  outlay, 
and  when  combined  with  fines  for  change  of  possession 
the  revenue  obtained  is  generally  satisfactory.  Neverthe- 
less the  hereditary  lease  is  in  reality  a  step  towards 
alienation.  The  tenant  holding  by  this  tenure  is  part 
owner  and  in  course  of  time  tends  to  take  the  position  of 
full  owner  subject  to  a  rent  charge2;  more  especially  is 
this  true  when  the  fines,  as  usually  happens,  are  redeemed 
by  a  fixed  payment.  The  head  landlord — i.  e.  with  regard 
to  public  lands  the  State — is  substantially  a  creditor  entitled 
to  certain  remedies  if  his  obligation  is  not  paid.  What 
seems  the  most  prudent  policy,  alike  on  financial  and  social 
grounds  with  respect  to  state  management  of  property,  is 
to  follow  the  system  adopted  by  the  best  individual  land- 
owners, and  the  forms  between  which  choice  will  generally 
lie  are  the  lease  for  a  sufficient  term  of  years  and  the 
hereditary  lease ;  the  former  is  financially  the  wisest,  but 
special  circumstances  may  make  the  emphyteusis — to  use 

1  For  the  origin  of  the  Emphyteusis,  see  Gaius,  iii.  145  ;  cp.  the  Aforamento 
in  Portugal  described  by  Laveleye,  Cobden  Club  Essays (ist  Series),  241. 

2  Thus  the  Emphyteiita  had  for  his  remedy  the  utilis  acfio  in  rent  closely 
analogous  to  the  Vindicatio  or  owner's  remedy. 


CHAP.  II.]    THE   STATE    DOMAIN.      LANDS   AND    FORESTS.        167 

the  old  title — more  convenient,  when  we  must  remember 
that  the  land  revenue  is  practically  converted  into  a  fixed 
charge.  Leases  for  lives  are  open  to  the  objection  that 
they  are  uncertain,  but  by  judicious  regulations  as  to 
renewals  much  of  the  evil  of  insecurity  can  be  avoided. 

The  modes  of  setting  vacant  farms,  the  duty  of  supply- 
ing buildings  and  permanent  improvements,  and  the  form 
in  which  rent  is  to  be  received,  have  all  been  carefully 
discussed  in  the  older  financial  treatises.  Most  of  these 
questions  belong  to  practical  administration  and  are,  more- 
over, not  of  great  interest  in  modern  times.  Certain  plain 
rules  may,  however,  be  stated.  The  claims  of  successors 
to  the  late  tenant  should  not  be  overlooked  ;  it  is  better 
for  the  tenure  to  be  continued  without  break,  and  therefore 
the  question  of  new  letting  ought  rarely  to  occur.  When 
it  does,  the  best  mode  of  disposal  will  depend  on  the  cir- 
cumstances of  the  particular  district  ;  with  capitalist  farmers 
letting  to  the  highest  bidder  is  admissible  and  it  excludes  all 
chance  of  unfairness.  But  where,  as  notably  was  the  case 
in  Ireland,  there  is  exaggerated  competition  for  land,  the 
amount  of  rent  payable  over  a  series  of  years  by  a  solvent 
tenant  should  not  be  exceeded.  In  such  cases  a  sale  of 
the  interest  subject  to  a  fixed  rent  seems  the  best  course. 
The  supply  of  suitable  buildings,  and  the  institution  of 
permanent  improvements  must,  under  a  system  of  short 
leases,  be  carried  out  by  the  State,  but  the  modern  plan  of 
advancing  public  funds  for  improvements  could  be  easily 
applied,  the  interest  on  loans  being  added  to  the  rent 
and  paid  at  the  same  time.  Hereditary  leaseholds  may  be 
safely  left  to  the  tenant  as  he  gains  all  the  benefit  of 
improvements.  The  form  of  rent  ought  clearly  to  be,  as 
far  as  possible,  in  money.  Special  conditions  may  make 
payment  in  kind  more  convenient,  but  this  mode  of 
receiving  rent  should  be  only  temporary  and  all  possible 
efforts  be  tried  to  introduce  the  more  definite  system  of 
money  payments.  Even  where  for  practical  convenience 
the  rent  is  a  fixed  part  of  the  total  produce,  the  actual 


l68  PUBLIC    FINANCE.  [BOOK  II. 

payment  had  best  be  in  money,  the  various  articles  being 
estimated  at  their  money  value. 

§  7.  We  are  now  in  a  position  to  deal  more  fully  with 
the  expediency  of  extending  the  state  lands.  In  their 
extremest  form  plans  of  this  kind  aim  at  the  acquisition 
by  purchase  of  all  private  landed  property.  More  moder- 
ate proposals  seek  to  increase  those  possessions  in  a 
smaller  degree.  Any  plan  of  the  kind  even  limited  in 
the  most  careful  manner  is  open  to  overwhelming  objections. 
It  amounts  to  the  creation  of  a  new  public  department 
engaged  in  countless  dealings  with  what  is  the  most 
intricate  and  complicated  form  of  property  ;  arrangements 
as  to  valuation,  the  renewal  of"  leases,  allowances  for  im- 
provements, abatements  for  unexpected  losses,  the  main- 
tenance and  audit  of  innumerable  accounts  would  all  fall 
to  the  lot  of  the  department.  It  would,  on  the  supposition 
of  purchase,  have  to  pay  interest  on  a  large  amount  of  debt. 
There  would  be  little  hope  of  a  favourable  financial  result 
under  such  conditions.  In  short,  we  may  say  that  if  land- 
nationalization  without  purchase  is  palpably  unjust,  land- 
nationalization  with  purchase  is  as  evidently  inexpedient. 
The  same  arguments  apply  to  smaller  acquisitions  of  land. 
They  have  little  chance  of  being  remunerative,  while  they 
so  far  contract  the  supply  of  a  much  desired  commodity 
and  they  necessitate  a  class  of  administrative  duties  that  are 
of  exceptional  difficulty.  If  the  alienation  of  state  lands 
should  only  be  carried  out  with  due  care  and  deliberation, 
the  acquisition  of  new  estates  can  only  be  justified  on 
nr^-financial  grounds.  Practical  politics  clearly  conform 
to  this  rule  of  prudence.  State  lands  are  often  alienated 
and  seldom  acquired,  and  in  these  latter  cases  there  is 
generally  some  social  or  political  reason  as  the  actuating 
cause.  We  may  look  on  the  slow  decline  of  the  state 
domain  as  one  of  the  permanent  facts  of  financial  deve- 
lopment. 

§  8.  So  far  we  have  confined  our  attention  to  the  case  of 
cultivated  land — of  •  farms  ;  as  Carey  would  say — where  the 


CHAP.  II.]   THE   STATE    DOMAIN.      LANDS   AND    FORESTS.         l6g 

ordinary  economic  motives  operate  with  considerable  force. 
The  State,  it  seems,  had  best  avoid  entangling  its  interests 
with  the  difficult  questions  of  land  tenure,  and  can  hardly 
expect  any  financial  advantage  from  retaining  its  owner- 
ship of  land.  It  does  not  follow  that  with  regard  to  other 
closely  allied  forms  of  extractive  industry  it  may  not  be 
expedient  to  retain  or  even  extend  public  ownership.  The 
principal  example  is  afforded  by  forests,  and  in  their  case 
the  wisdom  of  alienation  is  far  less  clearly  established. 
Individual  self-interest  is  not  in  the  same  general  agree- 
ment with  public  advantage  as  with  regard  to  ordinary 
agriculture.  The  creation  of  a  forest  is  a  work  of  time 
and  technical  skill  which  can  hardly  bring  in  recompense 
to  the  originators,  and  existing  forests  are  a  ready  resource 
for  the  embarrassed  owner.  Moreover,  forestry  is  only 
applicable  to  large  tracts  of  land,  and  is  most  profitably 
carried  on  where  the  soil  is  of  little  use  for  other  purposes. 
The  estate  of  the  large  owner  is,  as  we  saw,  not  very 
differently  managed  from  the  state  domain,  and  therefore 
some  of  the  usual  arguments  against  public  ownership 
lose  their  weight.  There  is,  besides,  the  important  effect 
of  suitable  plantation  on  climatic  conditions,  and  in  some 
countries  the  need  of  wood  as  the  only  available  fuel. 
There  is  here  a  striking  example  of  failure  in  that  harmony 
of  individual  and  general  interest  which  was  so  enthusiasti- 
cally set  forth  by  Bastiat  and  became  a  '  watchword  '  of 
what  was  supposed  to  be  '  Political  Economy.'  The  case 
against  not  simply  state  owership,  but  even  direct  state 
management  is  accordingly  deprived  of  its  foundatic  ~» ; 
while  the  promotion  of  his  own  interest  had  best  be  left  co 
the  individual,  the  interest  of  the  community  cannot  ahvctys 
be  safely  entrusted  to  his  hands.  The  real  questions  at  issue 
are  to  be  decided  by  estimates  as  to  (i)  the  influence  of 
other  than  purely  self- regard  ing  motives  on  the  proprietors, 
(2)  the  amount  of  general  interest  that  is  jeopardized  by 
the  possible  action  of  individuals,  and  (3)  the  probability 
that  public  management  will  secure  the  desired  results. 


170  PUBLIC    FINANCE.  [BOOK  II. 

In  reference  to  the  first  it  has  been  universally  remarked 
that  large  proprietors  are  in  many  cases  willing  to  give 
up  a  portion  of  present  wealth  for  the  future  advantage 
and  beautifying  of  their  estates,  while  peasant  proprietors 
show  no  such  disposition,  but,  on  the  contrary,  seek  imme- 
diate gain  by  the  removal  of  valuable  timber l.  The 
inattention  of  the  State  to  forests  in  England  compared 
with  continental  conntries  is  partly  explicable  on  this 
ground.  English  proprietors  have  done  at  their  own  cost 
what  foreign  countries  have  to  secure  at  the  public  ex- 
pense. Another  reason  is  to  be  added.  The  supply  of 
fuel  in  England  is  not  dependent  in  the  smallest  degree 
on  the  cultivation  of  timber,  and  the  recent  developments 
of  naval  architecture  have  destroyed  the  importance  of 
forests  as  a  source  of  shipbuilding  material,  the  object  to 
which  the  Woods  and  Forests  Department  principally 
attended.  Considerations  of  climate  are  besides  of  less 
weight  in  the  case  of  islands  subject  to  the  equalising 
influence  of  the  sea.  We  can  thus  easily  understand  the 
peculiar  attitude  of  England  and  the  reasons  for  the  very 
different  policy  of  the  Indian  Government  where  the  cir- 
cumstances are  in  all  essential  points  reversed.  The 
chance  of  success  in  state  administration  of  forests  depends 
on  the  application  of  the  best  scientific  and  technical 
ability  to  the  work  which  can  only  be  attained  by  effective 
organization.  Among  examples  we  may  mention  the 
Indian  forests  department  and  the  Prussian  organization. 
The  objects  of  a  sound  method  of  dealing  with  this  part 
of  the  public  domain  are  not  mainly  financial,  though  good 
management  may  make  them  yield  a  surplus.  But,  as 
appeared  in  dealing  with  expenditure  2,  it  is  quite  possible 
that  the  general  revenue  of  the  State  may  have  to  con- 

1  e  Presque  par  tout  le  paysan  rfaimc  pas  la  foret,  dans  le  Midi  il  n'ai/nc 
fas  Tarbre  ;  il  ria  qiiimefaible  idee  d'tttilite  indirecte  des  chases.     Les  grandes 
ct  les  moyennes  proprietes,  les  pares,  auxquels  s'attaque  lafrivolitedemocratiqiic, 
rendent  a  ce  point  de  vuc  de  reels  services  a  la  coinmunaute*  Leroy  Beaulieu, 
Etat  Moderne,  124. 

2  Supra,  Bk.  i.  ch.  6.  §  3. 


CrtAP.  II.]   THE   STATE    DOMAIN.      LANDS   AND    FORESTS.        171 

tribute  for  the  maintenance  of  the  requisite  plantings, 
when  the  policy  has  to  be  judged  on  the  grounds  of 
expenditure  in  general. 

§  9.  The  necessities  of  practice  have  led  States  to  a 
recognition  of  the  special  advantages  of  directly  controlling 
forests.  In  all  nations  they  form  the  largest  part  of  the 
public  land,  the  figures  for  France  have  already  been 
given,  and  the  same  general  features  mark  the  position 
in  other  countries.  The  broad  result  is  that  about  one- 
third  of  the  forests  of  Germany  are  held  by  the  States  ; 
about  one-sixth  by  communes  and  quasi-public  bodies  ; 
very  little  over  half  remaining  in  private  ownership.  In 
Austria  one-fourth  belongs  to  public  bodies,  and  in  Norway 
one-eighth. 

The  excess  of  forests  over  other  state  land  is  easily 
explained  when  we  call  to  mind  that  they  are  the  last 
remnants  of  the  old  common  property.  To  a  primitive 
community  land  with  timber  is  of  little  service.  When,  at 
a  later  time,  wood  rises  in  value  the  one  aim  is  to  clear  the 
soil  as  speedily  as  possible,  and  land  still  under  trees  is 
waste.  The  fact  that  poor  soil  is  often  best  suited  for 
planting  tends  to  confine  it  to  land  of  this  kind,  since  more 
fertile  land  is  turned  to  other  and  better  uses.  The  recent 
movement  towards  reafforesting  is  for  the  same  economic 
reason  directed  towards  inferior  land,  and  it  is  only  by 
adopting  this  policy  that  new  forests  can  be  made  even 
tolerably  remunerative.  There  is  almost  a  consensus  of 
competent  opinion  in  favour  of  state  action  for  the  pur- 
pose of  increasing  the  area  under  trees,  and  directly  ad- 
ministering those  areas  by  a  skilled  and  well-organized 
staff1. 

Most  European  countries  have  a  considerable  area  of 
uncultivated  land  which  would  be  particularly  suitable  for 
planting  and  a  well-considered  system  of  purchase  by  the 
State,  perhaps  accompanied  and  facilitated  by  the  sale  of 
the  other  parts  of  public  landed  property  is  likely  to  be 

1  Leroy  Beaulieu,  i.  46-66,  91-2  ;  Wagner,  i.  571  sq ;  Roscher,  §§  16,  17. 


172  PUBLIC    FINANCE.  [BOOK  II. 

advantageous.  The  financial  results  cannot  be  of  much 
importance.  Prudence  and  judgment  may,  however,  save 
a  good  deal  of  unnecessary  expenditure  and  combine  the 
two  ends  of  public  economy — utility  and  saving  of  effort. 

§  10.  The  division  of  control  over  landed  property 
between  the  central  and  local  governments  can  hardly  be 
arranged  on  general  principles.  Historical  conditions  and 
the  special  features  of  each  case  are  the  principal  factors  in 
the  settlement.  Management  by  a  central  department  is 
open  to  the  dangers  of  laxity  in  administration  along  with 
pedantry  in  the  application  of  inflexible  rules.  Public 
estates  so  placed  have  all  the  defects  attributed  to  the 
absentee  proprietor.  Local  bodies  have  a  different  but  not 
less  serious  draw-back,  viz.  the  danger  of  jobbery  and 
intrigue  in  the  administration  of  what  ought  to  be  applied 
to  the  best  advantage  of  the  community.  This  evil  is  of 
varying  magnitude  according  to  the  size  of  the  body. 
Among  the  larger  German  States  as,  e.  g.  Wiirtemberg  or 
Baden,  it  disappears  completely.  In  a  small  French  or 
Swiss  Commune  it  is  at  its  maximum.  The  dealings  with 
public  or  quasi-public  property  by  small  corporate  bodies 
need  to  be  carefully  controlled  and  regulated,  and  this 
necessity  has  been  recognised.  Thus  the  French  Communes 
are  unable  to  sell  or  grant  a  lease  of  their  lands  for  more 
than  eighteen  years  without  the  sanction  of  the  Prefet  in 
the  council  of  the  Prefecture1.  The  property  of  British 
corporations  has  in  former  times  suffered  from  the  want  of 
such  control,  as  has  also  that  of  the  Swiss  communes. 
When  local  government  is  applied  to  a  sufficiently  large 
area  and  public  spirit  is  operative,  landed  property  is 
generally  better  managed  than  it  would  be  by  a  central 
department.  The  concessions  to  tenants  are  more  liberal, 
but  except  where  the  land  is  within  an  urban  district,  its 
sale  is  probably  advisable  if  there  is  a  local  debt  sufficient 
to  absorb  the  purchase  money :  where  this  is  not  so  there  is 

1  Say,    Dictionnaire    dcs    Finances,    s.  v.    'Communes,'    1120;     see    also 
'Alienation,'  117-8. 


CHAP.  II.]   THE    STATE    DOMAIN.      LANDS   AND    FORESTS.          173 

the  danger  of  the  price,  which  is  really  capital,  being  treated 
as  current  revenue.  The  retention  of  building  sites  by 
corporations  is,  where  practicable,  the  happiest  solution  of 
the  vexed  problem  of  taxation  of  ground  rents,  and  their 
alienation  should  not,  unless  in  the  exceptional  cases  of 
extraordinary  pressure  or  special  encouragement  to  small 
proprietors  be  sanctioned. 

The  above  considerations  are  in  some  degree  modified 
with  regard  to  forests.  So  far  as  the  inhabitants  of  rural 
districts  obtain  fuel  from  the  communal  possessions  there 
is  no  reason  to  object  to  local  management.  But  in  modern 
times  the  need  of  husbanding  and  developing  the  national 
forests  has  become  too  important  an  end  to  be  surrendered 
to  the  care  of  persons  whose  views  are  from  the  nature  of 
the  case  certain  to  be  limited  to  a  particular  district  and 
the  present  advantage.  The  result  has  been  a  very  general 
centralization  of  management  in  this  respect.  France,  Italy, 
Switzerland,  and  the  United  States  have  all  dealt  with  the 
matter  as  one  for  the  central  government.  The  Swiss 
cantons,  so  jealous  of  their  autonomy,  have  not  refused  to 
surrender  the  control  of  forests  to  the  Federal  government. 
All  the  conditions  that  we  noticed  in  a  former  chapter  as 
tending  in  favour  of  central  management  are  in  operation 
here.  General  interest,  need  of  trained  intelligence,  and  of 
unity  of  control  make  it  expedient  to  continue  the  policy 
of  centralization. 


CHAPTER  III. 
THE  INDUSTRIAL  DOMAIN. 

§  1.  IN  the  preceding  chapter  the  gradual  decay  of  state 
revenue  from  landed  property  has  been  considered.  Special 
circumstances  may  preserve  a  comparatively  large  amount 
of  agricultural  possessions  in  the  case  of  some  nations,  but 
so  long  as  the  present  system  of  private  ownership  and  free 
competition  continues — and  it  is  only  to  societies  resting 
on  that  economic  basis  that  attention  need  be  directed — 
no  large  part  of  the  State's  resources  can,  speaking 
generally,  be  obtained  through  the  rent  of  public  lands. 
The  universal  tendency  exhibited  in  countries  so  widely 
separated  in  all  respects  as  England,  the  United  States, 
and  India  is  towards  a  relative,  or  even  an  absolute  decline 
in  the  revenue  derived  from  this  form  of  receipts. 

Another  class  of  public  property  does  not  show  so  clearly 
the  same  movement.  The  industrial  domain,  if  it  has  been 
contracted  in  some  directions,  has  been  enlarged  in  others, 
and  its  position  in  state  aud  public  economy  is  deserving 
of  the  most  careful  examination.  For  this  purpose  it  is 
best  to  take  the  leading  groups  of  industrial  activity  be- 
ginning with  that  which  belongs  to  extractive  industry, 
and  is  consequently  nearest  to  agriculture  and  forestry. 

§  2.  Besides  the  retention  of  agricultural  land  and  forests, 
the  State  has  in  most  societies  regarded  mines  as  belonging 
to  itself.  Thus  the  famous  silver  mines  of  Laurium  were 
an  important  source  of  revenue  to  the  Athenian  people 
who  let  them  out  on  lease.  Rome  retained  its  salt  mines 
and  monopolized  the  sale  of  the  product.  As  the  Roman 


CHAP.  III.]  THE    INDUSTRIAL    DOMAIN.  175 

dominion  extended  by  conquest  the  mines  of  the  provinces 
came  under  its  control.  The  modes  of  management  applied 
were  different  in  respect  to  the  various  minerals,  gold  and 
silver  mines  being  directly  worked  by  the  state  slaves,  and 
other  mines  conceded  on  lease  or  abandoned  to  private 
working  subject  to  a  tax  proportional  to  the  produce. 

The  mining  laws  of  mediaeval  Europe  were  affected  by 
feudal  ideas  ;  they  placed  the  right  over  minerals  in  the 
4  Lord '  or  '  Seigneur]  and  the  influence  of  this  system  can 
be  traced  at  present  in  the  English  law  as  to  gold  and 
silver  mines.  The  desire  to  encourage  mining  industry, 
and  the  need  of  gaining  revenue  for  the  sovereign,  both 
tended  to  restrict  the  rights  of  landowners  with  respect  to 
what  lay  beneath  the  surface.  Hence  the  system  of  '  free 
mining,'  under  which  the  discoverer  was  entitled  to  open  a 
mine  against  the  landowner's  wish  subject  to  the  payment 
of  royalties  to  the  State  (Bergregal)  became  usual x.  Not- 
withstanding this  growth  in  continental  States  of  a  separate 
property  in  mines,  some  countries  retained  much  of  their 
mineral  wealth  as  public  property,  more  particularly  where 
the  landed  domain  also  was  extensive.  The  various  parts 
of  the  German  Empire  are  noticeable  for  their  state  mines, 
though  the  distribution  of  these  sources  of  wealth  is  far 
from  uniform.  Prussia  owns  coal,  iron,  lead,  silver,  and 
copper  mines,  which  (including  the  value  of  the  partially^ 
worked-up  products)  contributed  in  1884-5,  102  fr  million 
marks  gross  revenue.  Austria,  Russia,  Spain,  and  India 
also  possess  some  mines  as  state  property,  though  they  are 
practically  conceded  to  private  owners.  The  financier  is 
not  much  concerned  with  this  part  of  the  public  possessions 
as  the  net  revenue  obtained  is  small.  The  mines  and 
mining  works  of  the  Prussian  government  in  1884-5  gave 
only  17  \  million  marks  (about  £875,000)  as  their  net  yield. 
Salt,  which  in  many  countries  contributes  very  largely  to 
the  public  resources  does  so  through  taxation. 

1  Roscher,  Handel  und  Geiverbfleiss,  §  180. 


176  PUBLIC   FINANCE.  [BOOK  II. 

Whatever  be  the  net  return  from  mines  it  should — 
economically  considered — be  divided  into  two  parts,  (i)  the 
rent  of  the  mine  and  (2)  the  profit  on  its  working  including 
the  gain  of  elaborating  the  raw  material  obtained  from  it, 
where  this  is  done  at  the  mine.  The  former  is  essentially 
the  same  as  the  rent  of  land,  though  possessing  some 
peculiarities  due  to  the  exhaustible  nature  of  mineral  pro- 
ducts and  is  generally  levied  in  proportion  to  the  gross 
product.  Without  state  ownership  it  might  be  applied  as 
a  special  tax  on  private  owners  of  mines  1.  The  second 
element  is  plainly  the  result  of  the  employment  of  capital 
and  should  therefore  comprise  both  ordinary  interest  and 
employer's  gain.  The  use  of  capital  in  mining  is  a  highly 
speculative  one  being  most  uncertain  in  its  returns.  The 
receipts  from  the  Prussian  mines  have  varied  much  between 
1870-1880,  and  of  course  are  dependent  on  the  prices  of 
the  minerals  produced  2.  It  therefore  seems  desirable  to 
give  up  this  source  of  revenue  by  selling  the  mines  to 
private  individuals  or  companies,  and  applying  their  price 
to  the  reduction  of  debt,  and  from  the  financial  point  of 
view,  the  wisdom  of  the  policy  of  sale  is  indisputable.  The 
continuance  of  mines  as  state  property  is  due  partly  to  the 
survival  of  the  older  forms  of  public  economy  in  which  taxa- 
tion was  subordinate  to  quasi-private  receipts,  and  partly  to 
views  of  economic  policy.  The  danger  of  mineral  supplies 
being  worked  in  a  reckless  and  extravagant  manner  without 
regard  to  the  welfare  of  future  generations,  and  the  dread 
of  combinations  by  the  producers  of  such  commodities  as 
tin,  copper,  and  salt,  with  the  aim  of  raising  prices,  have 
both  tended  to  hinder  the  alienation  of  state  mines.'  There 
are  fortunately  other  and  more  effectual  methods  of  ward- 
ing off  these,  by  no  means  imaginary  evils 3.  The  dis- 

1  On  the  value  of  mining  rents  see  Sorley,  Mining  Royalties ;  also  Marshall, 
Principles,  i.  491. 

2  Wagner,  i.  609. 

3  Jevons'   Coal  Question,  354 sq.     The  recent  'rings'  in  the  articles  men- 
tioned in  the  text  illustrate  the  danger,  but  in  the  case  of  the  two  former  the 
originators  have  suffered  heavily. 


CHAP.  TIL]  THE   INDUSTRIAL   DOMAIN.  177 

posal  of  state  property  does  not  carry  with  it  a  surrender 
of  the  right  of  state  regulation  where  public  interests 
require  it.  It  is  also  possible  to  retain  the  ownership  or 
dominium  in  the  State,  giving  long  leases  to  the  capitalist 
workers  by  which  system  the  risk  of  marked  fluctuations  is 
in  a  great  measure  avoided  ;  or,  finally,  the  net  receipts  from 
mining  industries  may  be  specially  taxed. 

In  one  case,  the  policy  of  sale  may  not  be  a  wise  one. 
When  the  particular  product  of  a  mine  is  taxed,  the  neces- 
sity for  supervision  compels  the  public  officials  to  watch 
the  processes  closely,  and  under  such  conditions  to  place 
the  whole  business  in  the  hands  of  the  administration  or  of 
a  powerful  company  may  be  the  best  course  and  prove  the 
least  inconvenient  to  all  concerned.  The  principal  example 
is  in  the  case  of  salt  which  is  taxed  in  most  countries,  and 
monopolized  by  the  State  in  some.  Where  the  supply  is 
obtained  from  mines  there  is  an  obvious  advantage  in 
keeping  them  in  the  hands  of  the  State l. 

§  3.  The  modern  State  has  not  confined  its  activity  to 
extractive  industries.  In  the  iyth  century,  France  started 
some  of  those  model  manufacturing  establishments  which 
continue  to  the  present,  and  possess  so  varied  a  character2. 
The  German  States  followed  a  similar  course,  and  during 
the  1 8th  century  many  artistic  industries  were  founded 
under  official  management.  The  object  was  not  financial ; 
it  was  rather  to  supply  a  standard  for  private  producers  and 
to  discharge  the  functions  now*  supposed  to  belong  to 
exhibitions.  The  more  costly  products  were  intended  for 
court  use  or  as  gifts  to  foreign  princes  3. 

This  class  of  state  factories  has  preserved  its  original 

1  See  Bk.  iv.  ch.  6  for  the  salt  tax. 

2  <  On  ne  se  fait  pas  une  idee  de  tout  ce  quefabrique  Vetat  en  France  ;   ilfait 
de  tapis  (les  Gobelins},  des porcelains  (Sevres},  des  cartes  au  Bureau  d'etat  major, 
des  gravures  (au  Louvre),  de  Pimprimerie  (<J  F  Imprimerie  Nationale] :  il  fait 
des  boites  d1  allumettes ,  des  cigarettes,  il  eleve  des  chevaux  et  des  poulains  dans 
ses  haras  ;    il  fait  du  vin  a  fecole  d?  agriculture  de  Montpellier}  Gide,  L?£cole 
Nouvelle,  18. 

3  Wagner,  i.  623. 

N 


178  PUBLIC   FINANCE.  [BOOK  II. 

type  and  is  important  only  as  giving  examples  of  superior 
work  or  supplying  some  state  need  for  a  certain  commodity. 
But  though  financial  aims  are  not  prominent  in  this  depart- 
ment of  public  economy,  there  are  opportunities  for  realiz- 
ing a  moderate  revenue  by  careful  management  and  securing 
a  superior  class  of  products. 

The  latter  consideration  becomes  of  great  importance 
when  we  pass  to  the  method  of  supplying  the  larger  public 
services  such  as  the  military  and  naval  forces.  The  diffi- 
culty of  deciding  on  the  best  mode  of  meeting  the  manifold 
needs  of  modern  armies  and  fleets  is  chiefly  due  to  the 
conflict  of  financial  and  technical  reasons.  As  we  shall  see, 
there  are  strong  economic  and  financial  objections  to  direct 
manufacture  by  the  State.  But  in  some  cases  it  is  essential 
to  secure  a  high  standard  of  excellence  in  the  products. 
Guns  that  will  not  go  off  at  the  right  time  and  bayonets 
that  bend  under  pressure  are  dear  at  any  price :  and  state 
establishments  for  the  production  of  these  articles  are 
defended  on  the  ground  that  in  no  other  way  can  goodness 
of  quality  be  guaranteed.  The  state  clothing-factories  and 
flour-mills  have  been  supported  by  like  arguments,  since  it 
is  assumed  that  complete  supervision  of  private  contractors 
is  practically  impossible.  On  purely  financial  grounds 
state  industries  of  the  kind  are  open  to  serious  criticism 
owing  to  the  very  defective  system  of  keeping  accounts 
which  is  characteristic  of  such  establishments.  The  amount 
of  invested  capital  is  hardly  ever  properly  estimated ; 
receipts  that  should  go  to  capital  are  assigned  to  revenue, 
and  expenditure  that  ought  to  be  met  from  revenue  is 
defrayed  from  other  state  funds  or  by  borrowing l.  To 

1  This  defect  in  state  industrial  management  is  very  forcibly  exposed  in 
Cobden's  last  speech  in  Parliament  (July  22nd,  1864):  'Throughout  the  in- 
quiries before  Parliamentary  Committees  upon  our  Government  manufactories, 
you  find  yourself  in  a  difficulty  directly  you  try  to  make  the  gentlemen  at 
the  head  of  these  establishments  understand  that  they  must  pay  interest  for 
capital,  rent  for  land,  as  well  as  allow  for  depreciation  of  machinery  and  plant,' 
Speeches  (popular  ed.),  301-2.  'The  accounts  rendered  of  this  clothing 
department  are  most  fallacious.  I  find  that  about  ;£i  5,000  a  year  for  fixed 
charges  and  interest  of  money  have  never  been  brought  into  the  accounts  at 


: 


CHAP.  III.]  THE   INDUSTRIAL   DOMAIN.  179 

meet  this  evil  it  seems  best  in  a  developed  industrial 
community  to  trust  to  private  enterprise  for  the  supply 
even  of  warlike  implements.  The  growth  of  such  factories 
as  those  of  Elswick  and  Essen  ought  to  enable  Govern- 
ment to  dispense  with  the  troublesome  institutions  that 
require  so  much  attention  and  vigilance  to  prevent  the 
grossest  abuses.  Where  there  is  not  a  fully  grown  system 
of  industry  it  may  be  necessary  to  keep  up  state  arsenals, 
dockyards,  and  factories,  to  supply  wants  that  would  other- 
wise remain  unsatisfied,  and  it  is,  perhaps,  partly  to  this 
earlier  condition  that  we  owe  the  erection  of  the  state 
industries  in  question.  Moreover  the  possibility  of  keeping 
down  prices,  by  having  an  alternative  source  of  supply  in 
the  not  unknown  case  of  there  being  only  one  private 
factory  in  existence,  may  be  allowed  in  favour  of  state 
industry,  though  against  it  there  is  the  risk  of  political 
corruption  in  towns  that  are  largely  supported  by  public 
outlay.  Admitting  then  that  the  State's  manufactories  for 
its  own  use  are  necessary  only  in  the  earlier  stages  of 
development,  and  ought  to  diminish  as  society  advances, 
we  may  go  on  to  assert  that  the  same  proposition  is  true 
of  public  industry  in  general.  The  Government  of  a  back- 
ward country  may  rightly  undertake  works  that  would  be 
quite  uncalled  for  in  more  advanced  nations.  British  India 
gives  us  numerous  illustrations.  The  most  promising  agri- 
cultural industries  have  been  taken  under  state  management, 
and  costly  experiments  have  been  tried.  The  best  available 
evidence,  however,  leads  to  the  conclusion  that  the  greater 
part  of  these  well-meant  efforts  have  been  unsuccessful,  and 
have  in  some  instances  been  abandoned 1. 

§  4.  Though   any   very  large   system   of  state-directed 

all,  and  that  there  is  no  allowance  for  rates  and  taxes,'  ib.  304.  Cp.  Parnell, 
'  Although  the  victualling  and  other  offices  that  carry  on  manufactures  produce 
accounts  by  way  of  showing  that  they  make  them  cheaper  than  they  can  be  got 
by  contract,  this  does  nothing  towards  supporting  their  case,  because  their 
accounts  are  all  kept  in  so  imperfect  a  manner  that  they  cannot  be  relied  on,' 
Financial  Reform,  162-3. 

1  Hunter,  Imperial  Gazetteer  of  India,  vi.  515-6. 

N  % 


l8o  PUBLIC    FINANCE.  [BOOK  II. 

industries  is  not  likely  to  be  a  financial  success,  and  is 
besides  open  to  other  weighty  objections  both  social  and 
political,  there  are  some  exceptions  to  the  general  state- 
ment. --There  is  no  validity  in  a  plea  of  laissez  faire  set  up 
in  opposition  to  special  cases  of  state  industry,  when  it  can 
be  shown  that  the  interests  of  the  community  will  be 
furthered  by  interference.  The  rule  of  non-intervention 
is  nothing  but  a  generalization  from  experience,  and  holds 
good  so  far  only  as  experience  supports  it.  Where  special 
reasons  justify  the  action  of  the  public  power  there  is  no 
ground  for  objecting  to  its  employment.  To  avoid  the 
opposite  and  more  dangerous  extreme,  we  should  add  that 
the  advantageous  conduct  of  certain  industries  by  the  State 
is  no  argument  in  favour  of  extending  its  activity  to  other 
and  dissimilar  cases. 

In  addition  to  the  direct  supply  of  the  needs  of  the 
public  services,  which  in  some  cases  is  a  good  ground  for 
the  State  undertaking  industrial  functions,  there  is  the 
important  class  of  cases  in  which  the  production  of  certain 
articles  is  subject  to  heavy  taxation.  In  such  cases  the 
placing  of  the  absolute  control  of  the  process  of  production 
in  the  hands  of  a  state  department  may  be  a  financial 
necessity,  as  the  only  effectual  remedy  against  fraud  and 
evasion.  The  French  tobacco  manufacture  is  probably  the 
best  example  of  this  system,  to  which  the  Bengal  opium 
regulations  may  be  added.  The  large  receipts  obtained 
from  these  industries  are  not  in  reality  industrial.  Scienti- 
fically speaking,  they  are  a  part  of  the  revenue  raised  by 
taxation  of  which  state  monopoly  is  a  particular  form  1. 
The  ordinary  gains  of  a  business  are  all  that  should  be 
credited  to  it  as  *  earnings,'  unless  the  extra  amount  is  due 
to  the  superior  efficiency  of  public  management. 

§  5.  The  remaining  cases,  where  the  industrial  action  of 
the  State  may  possibly  be  useful  and  has  in  practice  been 
largely  applied,  may  be  grouped  under  two  heads,  according 
as  they  exhibit  specially  one  of  two  characteristic  features  ; 

1  Bk.  iv.  ch.  6. 


CHAP.  III.]  THE   INDUSTRIAL   DOMAIN.  l8l 

viz.  (i)  those  industries  in  which  there  is  a  tendency  to 
the  creation  of  monopoly,  or  in  which  the  establishment  of 
monopoly  is  likely  to  prove  economically  advantageous, 
and  (ii)  the  large  and  important  industries  that  deal  with 
communication  and  transport.  This  classification  is  un- 
fortunately not  completely  distinctive,  since  the  last  group 
in  many  instances  exhibits  the  features  of  the  first- 
mentioned  one ;  but  it  is  sufficient  as  a  guide  in  discussing 
the  principal  points  of  interest. 

(i)  The  first  group  is  not  easily  characterised  and  separated, 
but  there  are  some  general  marks  that  may  be  taken  as 
common  to  all  the  industries  in  question  ;  they  are : — 

(i)  The  products  are  much  required,  and  in  some  cases  ab- 
solute necessaries  or  of  high  sanitary  importance.  (2)  They 
are  connected  with  special  localities,  and  situation  is  an 
element  in  their  advantages.  (3)  They  are  usually  subject 
to  the  (so-called)  lav/  of  '  increasing  returns,'  and  thus  con- 
centration and  unity  in  management  tend  to  cheapen  the 
product.  (4)  Competition  is  not  steadily  operative  even 
when  no  legal  restrictions  are  imposed  J. 

On  coming  to  collect  the  industries  that  belong  to  this 
group,  we  further  notice  that  they  in  great  measure  fall 
within  the  domain  of  local  rather  than  that  of  general 
government,  and  are  moreover  chiefly  due  to  the  conditions 
of  city  life. 

The  oldest,  and  one  of  the  most  important,  is  the  supply 
of  water.  Under  ordinary  circumstances  this  indispensable 
commodity  is  valueless  in  the  economic  sense,  and  has 
usually  been  the  stock  example  in  economic  text-books  of 
objects  that  possess  utility  but  are  not  wealth.  The  growth 
of  population  in  certain  confined  areas  at  once  creates 
a  greater  demand  than  can  be  supplied  from  natural  sources, 
and  at  the  same  time  pollutes  that  limited  amount.  Fresh 
supplies  must  be  obtained  from  a  distance,  and  often 

1  The  nature  and  characteristics  of  these  industries  are  discussed  by  Fairer, 
State  and  Trade,  68  sq.  Cp.  H.  C.  Adams,  Relation  of  the  State  to  Industrial 
Action. 


l82  PUBLIC   FINANCE.  [BOOK  II. 

necessitate  heavy  outlay.  In  earlier  times  this  of  itself 
made  it  incumbent  on  the  State  to  do  what  no  private 
individuals'  association  could  accomplish,  a  policy  ex- 
tensively carried  out  by  the  Romans.  In  the  modern 
period,  the  business  of  water-supply  to  cities  has  been 
placed  in  the  hands  of  private  companies,  who  have  in- 
vested large  amounts  of  capital  for  the  purpose.  The  rise 
of  the  sanitary  movement  of  the  present  century  and  the 
danger  of  monopoly  on  the  part  of  the  holders  have  led  to 
an  extension  of  public  activity,  and  to  the  purchase  of 
waterworks  by  the  municipalities.  This  tendency  has  been 
clearly  shown  in  the  United  Kingdom  during  the  last 
quarter  of  a  century.  Of  the  larger  towns,  London,  Bristol, 
and  Newcastle  only  are  supplied  by  private  companies,  and 
the  purchase  of  the  London  water-companies  is  already 
debated.  The  receipts  for  water-supply  by  English  local 
bodies  in  1887-8  were  over  ^"250,000.  In  the  United  States 
there  has  been  a  like  movement.  Out  of  135  towns  of 
above  10,000  inhabitants,  91  had  municipal  waterworks,  the 
remaining  44  being  supplied  by  companies.  Continental 
cities  also  in  many  cases  have  acquired  full  charge  of  this 
industry :  this  is  true  of  Berlin,  Paris,  and  Vienna,  not  to 
mention  smaller  towns  1. 

The  business  of  lighting  has  not  as  yet  been  so  largely 
entrusted  to  public  agency,  but  several  leading  British 
towns  have  acquired  their  gasworks  ;  Manchester,  Birming- 
ham and  Leeds,  Glasgow,  Edinburgh  and  Belfast  may  be 
mentioned  as  examples.  The  United  States  have  hardly 
entered  on  this  branch  of  state  industry.  Philadelphia  and 
Richmond  are  the  only  important  towns  that  have  public 
gasworks,  and  some  smaller  towns  have  public  stores  for 


1  For  the  position  of  English  municipalities  see  the  annual  Reports  of  Local 
Government  Board.  For  the  United  States,  The  relation  of  modern  munici- 
palities quasi-public  works  (American  Economic  Association,  ii.  no.  6) ;  also 
Ely,  Taxation  in  American  States  and  Cities,  47  sq.  For  Germany,  Wagner, 
ii.  160-4;  Roscher,  §  158.  Also  Leroy  Beaulieu,  £tat  Moderne,  228  sq. ;  Say, 
Dictionnaire  d"1  Economic  politique,  s.  v.  '  Eau  dans  les  Villes.' 


CHAP.  III.]  THE    INDUSTRIAL   DOMAIN.  183 

electric  light.  Most  German  cities  own  their  gasworks, 
while  Paris  is  supplied  by  a  privileged  company l. 

Drainage  and  the  removal  of  refuse,  as  well  as  other 
sanitary  arrangements,  are  usually  regarded  as  a  public 
function  involving  expense,  though  scientifically  these 
operations  are  on  exactly  the  same  plane  as  the  supply  of 
water  and  light,  and  might  be  carried  on  as  a  private 
business  ;  but  in  practice,  as  the  service  is  a  general  one,  its 
cost  is  defrayed  from  taxation. 

The  actually  existing  forms  of  these  public  industries, 
and  the  line  of  development  that  they  are  following,  are 
easily  explicable.  The  rapid  increase  of  public  waterworks 
is  due  to  the  great  importance  of  a  pure  supply  of  that 
necessary,  to  the  large  quantity  of  it  that  is  required  for 
public  purposes,  and  finally  to  the  absence  of  invention  in  the 
industry.  Lighting,  while  it  possesses  some  of  the  features 
just  mentioned,  is  very  different  in  the  last  respect.  Until 
the  contest  between  gas  and  electric-lighting  is  closed,  the 
acquisition  of  either  of  these  industries  will  be  a  financial 
risk  that  no  prudent  body  will  care  to  incur  2. 

§  6.  Without  dwelling  on  further  details,  or  considering 
the  politico-social  aspect  of  the  movement,  we  need  not 
hesitate  to  say  that  a  new  public  domain,  yielding  large 
gross  returns,  has  within  the  last  fifty  years  become  estab- 
lished in  most  civilized  States.  The  gas  and  waterworks  of 
the  United  Kingdom  under  municipal  working  give  an 
estimated  yield  of  about  ^"7,000,000,  and  the  similar  German 
industries  afford  a  considerable  net  return  to  the  local 
budgets.  It  is  quite  possible  that  in  the  next  century  such 
industries  will  give  substantial  aid  towards  meeting  the 
heavy  expenditure  that  town  administration  requires  3. 

On  the  other  hand,  there  are  some  financial  aspects  of 
the  case  which  reduce  this  apparent  gain  to  much  more 

1  In  addition  to  the  works  given  in  the   preceding  note   see  James,   The 
Modern  Municipality  and  the  Gas  Siipply,  and  Farrer,  State  and  Trade,  ch.  1 1. 

2  'Waterworks  are  generally  owned   by  our  municipalities  and  gasworks 
rarely,'  Ely,  48. 

3  Leroy  Beaulieu,  i.  no. 


184  PUBLIC   FINANCE.  [BOOK  II. 

moderate  dimensions.  The  purchase  or  construction  of  the 
needed  public  works  has  involved  municipal  governments 
in  heavy  debt.  Thus  the  latest  returns  of  English  munici- 
palities show  that  forty-six  leading  towns  had  an  outstand- 
ing debt  for  waterworks  of  £28,000,000,  while  thirty-one 
owed  £10,330,000  for  their  gasworks  ;  further,  that  forty 
towns  had  a  debt  of  over  £1,500,000  for  market  buildings. 
Adding  these  figures  together  we  get  over  £40,000,000  of 
debt  remaining,  besides  what  has  been  already  paid  off. 
According  to  the  United  States  Census  of  1880,  about 
£29,000,000  of  local  indebtedness  was  incurred  for  water- 
works. The  cost  of  these  loans  has  to  be  deducted  from 
the  gross  receipts  of  the  industries  before  a  full  estimate  of 
their  financial  position  can  be  made ;  and  though  the  actual 
debt  charge  is  enhanced  by  the  sinking  funds  attached1, 
there  is  on  the  other  side  the  cost  of  renewing  the  works 
after  a  period.  Another  deduction  has  also  to  be  made. 
On  the  assumption  that  the  different  public  industries  were 
left  open  to  private  enterprise,  it  would  be  possible  to  tax 
their  profits,  or,  as  most  of  these  industries  are  monopolies, 
to  levy  a  special  charge  on  their  gains.  The  right  of  sup- 
plying a  large  city  may  be  sold  to  a  company  or  let  for 
a  term  of  years,  and  the  revenue  thus  obtained  without 
risk  or  trouble  applied  to  the  services  of  the  municipality. 
By  granting  a  long  period,  with  the  ultimate  reversion  to 
the  local  governing  body,  a  large  revenue  would  be  pro- 
vided for  the  future,  and  the  difficulties  of  public  manage- 
ment escaped. 

As  in  the  case  of  mines  and  their  products,  any  excessive 
charge  for  municipal  services  must  be  regarded  as  taxation. 
The  profit  of  capital  expended  on  public  works  is  a  part  of 
the  earnings  or  industrial  receipts ;  so  is  any  further  amount 
gained  by  the  low  interest  at  which  well-managed  towns 
can  borrow,  or  the  savings  that  monopoly,  with  the  con- 
sequent check  to  waste  in  competition,  may  cause  ;  but  any 
additional  charge  for  the  supply  of  water,  gas,  or  other 

1  See  Bk.  v.  ch.  8.  for  an  examination  of  local  indebtedness. 


CHAP.  III.]  THE   INDUSTRIAL   DOMAIN.  185 

services  is  in  fact  a  tax  on  the  consumers  or  users  of  that 
service  \  We  have  noticed  before  this  mingling  of  earnings 
and  taxes  in  public  economy.  Another  financial  evil  may 
possibly  result  from  municipal  industries.  Instead  of  tax- 
ing the  consumers  by  heavy  rates,  the  administrators  may 
reduce  the  charges  below  the  profitable  level,  and  so  give 
what  is  in  fact  a  bounty  on  the  commodity  at  the  expense 
of  the  tax-payers.  Where  the  article  is  required  by 
the  poorer  members  of  the  community  the  temptation  to 
adopt  this  course  is  very  strong,  but  it  really  involves  the 
transfer  of  the  industries  so  dealt  with  to  the  head  of  ex- 
penditure ;  from  being  a  source  of  revenue  they  become  a 
charge  on  the  municipal  budget,  and  their  development 
only  adds  to  the  public  burdens. 

§  7.  (ii)  The  second  group  of  industries  leads  us  back  to 
the  Finance  of  the  central  power,  and  includes  amongst  its 
ranks  the  best  known  and  accepted  of  all  state  employments. 
The  Post  Office  has  been  regarded,  even  by  the  older 
economists,  as  an  exception  to  the  general  rule  against 
state  interference  in  trade  and  industry.  '  It  is  perhaps/ 
said  Adam  Smith,  '  the  only  mercantile  project  which  has 
been  successfully  managed  by,  I  believe,  every  sort  of 
government  Y  and  his  opinion  has  been  accepted  by  all  his 
English  followers,  none  but  the  extremest  advocates  of 
state  abstention  ever  questioning  the  public  management 
of  this  department. 

State  postal  service  originated  in  the  claim  of  the 
sovereign  to  monopolize  whatever  affairs  closely  affected 
public  interests,  and  in  the  need  of  communication  between 
officials.  Its  development  has  been  the  same  in  its  general 
features  in  all  European  countries.  At  first  the  service  was 
rendered  by  private  persons,  or  by  sKme  specially  privileged 
body  (e.  g.  in  France  the  messengers  of  the  University  of 
Paris),  and  was  finally  taken  by  the  State,  though  in  most 
instances  it  was  farmed  out  to  a  company. 

The  English  Post  dates  from  Charles  I  (there  being  little 

1  Cp.  Cohn,  §  458.  2  344- 


l86  PUBLIC   FINANCE.  [BOOK  II. 

evidence  for  the  earlier  dates  of  Edward  IV  and  Henry  VIII), 
and  became  a  strict  monopoly  during  the  Commonwealth. 
After  the  Restoration  it  was  bestowed  on  the  Duke  of 
York,  who  retained  it  on  his  accession  to  the  throne  as 
James  II  in  1685.  The  net  annual  revenue  was  at  that 
date  about  £50,000 1.  The  growth  of  revenue  during  the 
1 8th  century  was  steady,  and  various  improvements,  such 
as  the  introduction  of  mail-coaches  in  1784,  improved  its 
position.  The  invention  of  railways  and  steamships  further 
aided  the  expansion  of  the  postal  service,  until  in  1840 
the  introduction  of  the  penny  letter-post,  on  Rowland  Hill's 
proposal,  widely  distributed  the  advantages  of  cheap  com- 
munication. Without  in  the  least  denying  the  wisdom  of 
this  reform,  its  real  financial  result  was  not  what  is  popularly 
believed.  So  far  from  improving  the  net  revenue  of  the 
service,  it  actually  lowered  the  gross  revenue,  and  so  far 
reduced  the  already  deficient  income  of  that  period.  In 
1839  the  gross  revenue  had  been  .£3,390,000,  and  the  net 
revenue  £1,630,000.  In  1840  the  former  fell  to  £1,360,000, 
and  the  latter  to  £500,000,  showing  a  loss  of  over  £1,130,000, 
and  this  loss  continued  for  several  years  :  the  gross  receipts 
did  not  exceed  those  of  1839  till  1855,  and  the  net  revenue 
did  not  recover  its  losses  till  1864.  Taking  into  account 
the  growth  that  would  have  taken  place  even  under  the 
older  system,  it  is  plain  that  the  immediate  adoption  of  the 
penny  post  involved  a  sacrifice  of  financial  resources  2< 

The  French  post  office  was  instituted  by  Louis  XI  in 
1464,  and  carried  on  irregularly,  till  in  1627  the  service  was 
better  organized  and  improved.  The  business  was  farmed 
out  in  1672,  and  the  competition  of  the  agents  of  the 
University  of  Paris  was  prohibited  ;  the  yield  increased 

1  Macaulay,  History  of  England,  ch.  3. 

2  The  reform  is  described  by  one  of  the  most  sober  of  English  statesmen 
as  'A  measure  of  undoubted   social   and  general   advantage,  but  extremely 
inconvenient   in   a   financial   sense,'  Northcote,    Twenty    Years  of  Financial 
Policy,  9.     It  was  opposed  at  the  time  by  J.  R.  McCulloch  ;  see  his  Taxation 
and  funding,  327-32.     For  an  examination  of  the  uses  of  the  Post  Office  as  an 
agent  for  taxation,  see  Bk.  iv.  ch.  8. 


CHAP.  III.]  THE    INDUSTRIAL   DOMAIN.  187 

from  100,000  livres  in  1661  to  1,220,000  in  1677,  and 
1,400,000  livres  in  1683.  In  1699  the  postal  income  was 
2,800,000  livres,  in  1750  it  had  increased  to  4.500,000  livres, 
and  in  1788  it  reached  1 2,000,000  livres.  The  method  of 
farming,  so  common  under  the  Ancien  Regime,  made  it  in 
fact  a  monopolized  private  industry,  on  which  the  State 
levied  a  gradually  increasing  rent. 

The  Revolution  separated  the  carriage  of  letters  from  the 
other  duties  of  the  old  '  Poste}  and  in  1792  placed  the 
former  under  the  direct  management  of  the  State.  The 
great  financial  pressure  and  the  general  mismanagement  of 
the  revolutionary  period  caused  a  great  increase  in  the 
charge  for  letters,  destroyed  the  receipts  from  the  business, 
and  even  left  a  deficit  on  the  working.  The  postal  service 
did  not  gain  much  during  the  Consulate  and  Empire,  but 
several  improvements  were  introduced  after  1815.  The 
rates  were  better  adjusted,  and  the  increased  facilities  of 
transport  allowed  of  a  better  service.  The  example  of 
England,  whose  adoption  of  the  uniform  penny  post  at- 
tracted much  attention  and  was  eulogized  by  Bastiat,  led 
to  the  establishment  in  1848  of  a  charge  of  20  centimes  (2</.), 
which  has  been  raised  to  25  centimes  in  1850  and  again  in 
1871,  restored  to  20  centimes  in  1854,  and  finally  reduced 
to  15  centimes  (i\d.)  in  1878  \ 

The  same  fact  of  financial  loss  through  reduction  pre- 
sented itself  in  France  in  1848  as  in  England  in  1840.  The 
gross  revenue  fell  from  45,000,000  francs  to  32,000,000 
francs  in  the  first  year  after  the  change  (1849),  and  only 
recovered  the  earlier  amount  in  1855. 

The  postal  history  of  other  States  is  very  similar.  Ger- 
many, owing  to  its  political  disorganization,  was  in  part 
served  by  the  house  of  Thurn  and  Taxis,  who  managed  the 
carriage  of  letters  for  several  of  the  smaller  States.  The 
Prussian  post  began  in  1646,  and  was  under  direct  state 

1  For  the  French  Post  before  1 789  Vignes,  Traitl  des  Impdts,  i.  476  sq. ; 
Clamageran,  ii.  658  ;  iii.  43,  232,  293,  etc.  For  its  later  history  Leroy  Beaulieu, 
i.  645  sq. ;  De  Parieu,  iii.  287  sq. 

tSE 


UNIVERSITY 

^  Of 


l88  PUBLIC   FINANCE.  [BOOK  II. 

administration.  Its  net  yield  in  1685  was  less  than  40,000 
thalers  ;  by  1740  it  had  increased  to  220,000  thalers. 
The  financial  necessities  of  the  government  caused  an  in- 
crease in  the  tariffs,  and  in  1806  there  was  a  clear  surplus 
of  667,000  thalers.  The  amount  in  1856  had  risen  to  nearly 
1,760,000  thalers,  and  in  1862  to  over  2,200,000  thalers. 
The  events  of  1866  and  1870-1  changed  the  Prussian  post 
into  that  of  the  German  Empire — Bavaria  and  Wiirtemberg 
only  retaining  separate  establishments.  The  net  revenue  of 
the  imperial  post  was,  in  1874,  5,000,000  marks  (i  thaler  = 
3  marks) ;  in  1879, 17,500,000  marks;  and  in  1888,  28,000,000 
marks. 

The  postal  systems  of  Austria,  Russia,  Italy,  and  those 
of  the  smaller  European  States  need  not  be  examined  in 
detail.  Nor  does  the  postal  development  of  the  United 
States,  India  and  the  Colonies  present  any  special  features  of 
interest.  One  general  fact  is  the  smallness  of  the  revenue 
obtained.  England,  France,  and  Germany  are  the  only 
countries  that  derive  a  substantial  amount  from  the  post 1. 

§  8.  The  so-called  '  Post  Office '  is  in  fact  a  collection  of 
different,  though  connected,  industries.  The  earliest  state 
posts  in  both  England  and  France  carried  passengers  as 
well  as  letters,  and  this  function  lasted  in  the  latter  country 
till  the  Revolution,  when  the  state  passenger-service  became 
a  separate  organization,  and  endured  till  1870.  But  the 
conveyance  of  patterns,  books,  newspapers,  and  small 
parcels  forms  an  extensive  part  of  the  postal  service,  and  is 
the  least  profitable  side  of  its  endeavours.  The  rates  for 
these  separate  classes  are  below  the  ordinary  letter  charges, 
since  otherwise  the  amount  of  business  would  be  much 
reduced.  The  State  is  compelled  to  adopt  the  prin- 
ciple familiar  to  railway-managers  of  charging  what  '  the 
traffic  will  bear,'  but  it  necessarily  obtains  very  little  over 
the  cost  of  its  operations.  So  far  as  the  conveyance  of 
parcels  and  newspapers  is  concerned,  the  English  Post 
Office  does  not  possess  a  monopoly,  and  is  therefore  a  true 

1  Wagner,  ii.  142  ;  Cohn,  §§  293-6. 


CHAP.  III.]  THE   INDUSTRIAL   DOMAIN. 


,89 


industrial  agency  whose  earnings  contain  no  tax  element. 
The  German  post  has  specially  developed  the  conveyance 
of  parcels,  a  part  of  the  business  which  is  left  entirely  to 
private  companies  in  the  United  States,  and  is  a  recent 
addition  in  England  (only  since  iHSa)1. 

To  secure  a  proper  adjustment  of  rates  on  the  many 
classes  of  articles,  and  to  duly  apportion  cost  and  service 
to  the  several  items,  is  beyond  doubt  a  most  complicated 
problem.  Such  solutions  as  have  been  reached  are  for  the 
most  part  empirical,  and  are  the  outcome  of  innumerable 
changes.  The  mere  recapitulation  of  the  diverse  charges  of 
the  various  state  letter-posts  would  fill  many  pages  with 
figures  that  could  hardly  be  explained  on  any  definite 
principle.  There  are,  it  would  appear,  three  elements  that 
might  be  taken  into  consideration,  two  of  which  depend  on 
definite  physical  facts,  viz.  (i)  the  weight  of  the  communi- 
cation or  document ;  (2)  the  distance  over  which  it  has  to 
be  carried ;  and  (3)  its  nature ;  to  which  (4)  the  mode  of 
conveyance  might  conceivably  be  added.  The  first  is  at 
present  the  basis  of  the  charge  for  letters,  which  increases 
with  the  weight,  but  in  a  reduced  proportion,  and  there  is  a 
disposition  to  raise  the  lowest  weight.  The  second  element 
has  lost  most  of  its  importance.  Since  1839  the  question 
of  distance  has  entirely  disappeared  in  the  postal  charges 
of  the  United  Kingdom.  A  letter  from  Penzance  to  Wick 
pays  the  same  as  one  posted  to  a  person  residing  in  the 
same  street  as  the  sender.  France  has  with  one  exception 
adopted  the  same  policy  since  1848,  and  the  United  States 
have  also  a  uniform  rate,  practically  the  same  as  that  of 
England  (2  cents).  The  reason  for  this  at  first  sight  curious 
system  is  found  in  the  fact  forcibly  urged  by  Rowland  Hill, 
that  the  actual  cost  of  carrying  letters  is  small  enough  to 
be  ignored.  At  the  rate  of  one  penny  per  ounce  a  ton  of 
letters  all  up  to  the  full  weight  would  produce  almost  £i$o, 
while  the  mere  cost  of  conveyance  would  certainly  not  be 

1  Another  side   of  the   Post   Office,  its  dealings  with   money,  belongs  to 
'  Banking'  and  will  be  considered  under  that  head,  Bk.  ii.  ch.  4.  §  2. 


PUBLIC    FINANCE.  [BOOK  II. 

£5  or  one-thirtieth  of  the  receipts.  The  real  charges  are 
those  of  collection  and  distribution  and  the  maintenance  of 
offices,  the  cost  of  which  is  equal  on  all  letters.  The  uni- 
form charge  irrespective  of  distance  and  the  lower  charges 
on  additional  weights  are  thus  easily  explained  and  proved 
to  be  sound  as  well  as  equitable.  It  is  in  the  extension  of 
this  principle  to  international  postage  that  the  greatest 
advance  in  the  future  may  be  expected  l. 

The  character  of  the  articles  transmitted  is  now  one  of 
the  principal  distinctions.  Circulars  and  post-cards  would 
not  bear  the  same  charge  as  ordinary  letters.  The  trans- 
mission of  newspapers  and  books  gives  a  yet  smaller 
fund  of  utility  on  which  to  levy  a  tax,  and  the  result  is  a 
series  of  differential  charges  not  very  logical  or  simple,  but 
in  its  essence  expedient  in  the  interests  of  the  postal 
revenue.  The  mode  of  conveyance  might  be  used  as  a 
measure  of  the  relative  value  of  the  service,  speed  in  trans- 
mission being  a  very  important  part  of  the  advantage  of 
communication,  but  in  fact  this  test  has  been  little  used. 

§  9.  The  question  of  the  retention  of  the  postal  business  by 
the  State  is  hardly  an  open  one.  Long  experience  seems 
to  have  decided  altogether  in  its  favour.  No  country  has 
adopted  the  method  of  private  industry  as  regards  letters, 
though  the  extension  to  parcels  is  not  so  general.  The 
reasons  for  this  remarkable  unanimity  are  to  be  found 
partly  in  the  facts  of  governmental  administration,  partly  in 
certain  special  features  of  the  employment.  Before  the  rise 
of  the  economic  schools  that  opposed  industrial  action  on 
the  part  of  the  State,  the  method  of  public  postal  service 
was  firmly  established,  and  was  seen  to  give,  on  the  whole, 
sufficiently  satisfactory  results.  It  therefore  escaped  the 
hostile  criticism  that  economists  freely  bestowed  on  the 
less  efficient  public  departments.  Mr.  Herbert  Spencer 

1  The  Berne  Convention  of  1875,  by  which  the  uniform  rate  of  2^-d.  per  £x>z. 
was  settled  as  the  International  postage  charge  for  most  civilised  nations,  and 
gradually  extended  to  others,  has  been  a  great  advance.  India  and  the  Austral- 
asian Colonies  have  since  the  opening  of  1891  obtained  the  same  rate  with 
England. 


CHAP.  III.]  THE   INDUSTRIAL   DOMAIN.  191 

himself  has  hesitated  to  condemn  the  continuance  of  the 
English  Post  Office.  The  peculiar  nature  of  the  service 
supported  the  evidence  of  facts.  It  requires  as  a  first  con- 
dition that  the  agency  shall  cover  the  whole  territory  to  be 
served,  or  be  universal.  Next,  it  must  be  uniform  and 
regular,  and  conducted  on  a  definite  routine ;  and,  thirdly, 
the  necessary  capital  is  very  small  in  proportion  to  the  re- 
curring expenditure  and  receipts.  All  these  conditions 
favour  state  management,  while  its  close  connexion  with 
everyday  life  secures  a  constant  supervision  on  the  part  of  the 
public  who  are  the  consumers  interested  in  the  efficiency  of 
the  service1.  It  is,  therefore,  expedient  as  a  matter  of 
policy  to  place  the  work  in  the  hands  of  the  State,  and 
the  bestowal  of  a  monopoly  is  justified  on  the  double 
ground  that  otherwise  private  agencies  would  compete  for 
the  more  profitable  parts  of  the  business,  leaving  the  supply 
of  sparsely  peopled  and  backward  districts  to  the  official 
post  office,  while  the  waste  involved  in  rival  establishments 
would  hinder  the  reduction  of  rates  below  their  actual 
level. 

On  the  purely  financial  side  the  gain  from  the  service 
must  generally  be  a  small  one  ;  the  return  for  capital 
employed  is  little,  and  the  only  remaining  element  would 
be  the  economy  that  results  from  the  application  of  mono- 
poly, and  the  consequent  unity  of  the  service.  Any 
further  charge  is  really  a  form  of  taxation  and  requires 
to  be  tested  by  the  rules  applicable  to  that  mode  of  pro- 
curing revenue  2.  The  resources  to  be  obtained  are  in  any 
case  not  important,  though  good  management  may  easily 
prevent  a  deficit,  and  unduly  high  charges  will  by  their 

1  Adam  Smith  noticed  these  conditions  :  '  The  capital  to  be  advanced  is  not 
very  considerable.     There  is  no  mystery  in  the  business.     The  returns  are  not 
only  certain,  but  immediate,'  344 ;  cp.  the  fuller  account  of  Jevons,  Methods  of 
Social  Reform,  277-80;  also  Wagner,  i.  654-5. 

2  This  combination  of  different  elements  in  the  postal  revenue  has  led  to 
a  curious  diversity  in  the  classification  made  by  financial  writers.    Adam  Smith 
considers  it  under  the  head  of  'Funds  which  peculiarly  belong  to  the  sovereign. 
Leroy  Beaulieu  (Bk.  ii.  ch.  12),  De  Parieu  (iii.  285),  and  Cohn  (§  77),  place 


PUBLIC    FINANCE.  [BooK  II. 

reaction  on  industry  prove  seriously  detrimental  to  other 
financial  resources. 

§  10.  The  telegraph  as  a  state  business  forms  a  natural 
appendage  to  the  postal  system.  It  is  invariably  con- 
nected with  it  owing  to  the  resemblance  in  the  work  to  be 
done.  There  are,  however,  some  serious  differences. 
Unlike  the  letter  post,  telegraphic  work  has  been  success- 
fully carried  on  by  companies,  and  international  tele- 
graphy is  still  largely  in  their  hands.  The  capital  ex- 
penditure is  much  greater  in  the  case  of  the  telegraphs, 
and  therefore  leaves  room  for  that  tendency  of  official 
bodies  to  confuse  capital  and  revenue  which  we  have 
already  noticed  x  and  which  is  so  detrimental  to  sound 
Finance.  Not  only  is  the  original  cost  of  establishment 
or  of  the  purchase  of  pre-existing  rights  comparatively 
speaking  large,  but  incessant  renewals  and  extensions  are 
required  in  order  to  meet  wear  and  supply  new  demands. 
The  saving  by  unity  of  management  is,  besides,  not  so  great, 
and  the  cost  of  transmission  forms  a  larger  proportion  of 
the  expense,  which  increases  with  increased  work  more 
rapidly  than  in  the  letter-post. 

All  the  circumstances  suggest  that  state  telegraphy  is 
not  likely  to  prove  financially  successful,  and  such  is 
apparently  the  result  as  shown  by  experience.  The  inter- 
mingling of  postal  and  telegraphic  business  makes  it  hard 
to  establish  this  proposition,  but  where  a  strict  separation 
is  kept  up  the  telegraph  balance  is  generally  on  the  wrong 
side.  The  English  state  system  has  suffered  financially, 
first  from  the  excessive  purchase  money  given  to  the 
companies  who  held  the  business,  and  secondly,  through 

it  under  Taxation.  Roscher  (§28)  practically  follows  Adam  Smith.  Stein 
(ii.  315  sq.)  places  it  in  the  list  of  prerogative  rights  (regalia} ;  while  Umpfen- 
bach  (§§  61-3)  and  Wagner  (ii.  141  sq.)  regard  the  postal  revenue  as  being 
derived  from  '  fees  '  (Gebuhren).  These  differences  are  due  to  the  attempt  to 
reduce  to  simplicity  what  is  in  its  nature  complex,  and  are  therefore  necessarily 
failures.  J.  S.  Mill  distinguishes,  as  in  the  text,  between  the  industrial  .and  tax 
elements. 

1  §  3,  supra.  A  grave  oversight  was  committed  with  regard  to  the  English 
telegraph  account,  by  which  £800,000  was  spent  without  sanction. 


CHAV.  III.]  THE    INDUSTRIAL   DOMAIN.  193 

the  pressure  on  Parliament  for  lower  rates,  as  shown  in 
the  adoption  of  sixpenny  telegrams. 

If  full  power  to  regulate  its  rates  on  economic  principles 
be  given  to  the  department,  there  seems  to  be  no  reason 
why  it  should  not  at  least  meet  expenses,  including 
interest  on  capital,  or  perhaps  give  a  small  surplus  suf- 
ficient to  clear  off  the  first  charges  in  a  series  of  years. 
Behind  the  fiscal  question  there  remains  the  more  difficult 
one  of  the  effect  of  state  management  on  the  development 
of  improvements.  To  retard  the  progress  of  the  most 
essential  of  modern  auxiliaries  to  commerce  for  the  sake 
of  adding  a  sum  to  each  side  of  the  national  budget  is  not 
a  desirable  achievement.  The  dealings  of  state  agencies 
with  new  inventions  are  the  worst  blots  on  public  adminis- 
tration, and  it  seems  that  there  is  this  risk  in  the  State 
telegraphs,  that  though  they  are  quite  up  to  the  standard 
at  their  inception,  they  almost  insensibly  fall  behind  as 
it  advances  with  growing  knowledge.  This  consideration 
belongs  to  economic  policy  rather  than  Finance,  which, 
however,  suffers  from  any  hindrance  to  commercial  ex- 
pansion and  is  certainly  not  likely  to  gain  by  state  tele- 
graphy. 

§  11.  The  agencies  of  transport  and  the  different 
facilities  for  the  movement  of  goods  have  in  modern  times 
acquired  much  greater  prominence  and  have  to  some 
extent  come  to  occupy  a  different  financial  position. 
Adam  Smith  regards  the  maintenance  of  roads  and  canals 
as  one  of  the  duties  of  the  State,  requiring  expenditure 
that  ought  to  be  defrayed  out  of  the  special  receipts 
obtained  from  the  users.  His  recognition  of  the  so-called 
'fee-principle'  (Gebiihrenprincifi)  is  qualified  by  his  dis- 
cussion of  the  taxes  on  communication,  and  is  further 
weakened  by  the  modern  development  of  the  transport 
system l.  To  understand  the  financial  position  of  the 
industries  in  question,  we  have  to  separate  the  different 
forms  and  examine  them  in  order. 

1  303  sq. ;  cp.  379. 
o 


194  PUBLIC    FINANCE.  [BOOK  II. 

The  maintenance  of  ordinary  roads  can  hardly  be  re- 
garded as  a  quasi-private  industry.  It  is  a  part  of  the 
functions  of  the  State,  and  preferably  of  the  local  govern- 
ments. The  principle  of  particular  interest  assigns  this 
task  to  the  smaller  divisions,  unless  in  the  case  of  great 
main  lines  of  traffic,  but  in  no  way  does  it  fall  within 
the  industrial  domain,  unless  the  antiquated  method  of 
tolls  is  employed,  and  even  then  such  charges  have  more 
resemblance  to  taxes. 

The  canal  system  has  better  claims  to  treatment  under 
the  present  head.  Private  companies  have  in  many  in- 
stances reaped  large  profits  from  this  form  of  investment, 
and  there  seems  to  be  no  reason  why  the  State  should 
adopt  a  different  policy  when  it  is  the  owner.  In  practice 
the  usual  tendency  has  been  to  keep  the  rates  down  to 
the  amount  necessary  to  cover  expenses  and  meet  the 
interest  on  the  capital  charge.  .  The  introduction  of  rail- 
ways has  put  an  additional  strain  on  the  canal  finances, 
since  rates  have  to  be  kept  under  those  of  the  more  rapid 
competitor,  until  finally  in  many  cases  all  charges  have 
been  abandoned,  and  the  canals  have  been  maintained  at 
the  public  expense.  Such  has  been  the  position  in  France 
from  1880,  when,  contrary  to  the  opinion  of  experts,  the 
last  remnant  of  the  canal  dues  was  abolished.  The  Erie 
canal  constructed  by  the  State  of  New  York,  which  at 
first  gave  very  large  surpluses,  had  to  be  relieved  from  all 
tolls  in  1882.  The  German  rates  have  also  been  lowered,  so 
that  it  appears  that  no  assistance  to  the  national  or  local 
revenues  can  be  derived  from  this  source,  so  long  as  present 
industrial  conditions  continue,,  The  system  of  purely 
gratuitous  service  is  certainly  unjustifiable.  A  canal  ought 
at  least  to  pay  its  working  expenses,  otherwise  its  mainten- 
ance is  a  direct  loss.  The  charges  needed  for  this  purpose 
would  come  from  the  utility  that  it  affords,  and  the 
assumed  impossibility  of  levying  them  is  a  proof  of  the 
uselessness  of  the  service. 

With  regard  to  capital  expenditure  the  case  is  different. 


CHAP.  III.]  THE    INDUSTRIAL   DOMAIN.  195 

The  tendency  of  all  improvement  is  to  displace  fixed 
capital  previously  in  use  by  newer  and  better  forms,  and 
state  agencies  cannot  expect  to  escape  this  influence.  But 
the  existence  of  this  danger  is  a  good  ground  for  seeking 
to  get  the  maximum  net  revenue  in  the  earlier  years,  in 
order  to  wipe  off  the  capital  charge,  and  in  the  period  of 
decline  for  keeping  the  rates  at  the  highest  profitable 
level. 

Much  stress  has  been  laid  on  the  indirect  benefits  likely 
to  result  from  the  abolition  or  lowering  of  dues  on  water- 
ways by  encouraging  industry.  This  claim  really  amounts 
to  the  advocacy  of  a  bounty,  and  should  be  judged  on  that 
ground  l. 

§  12.  In  social  and  financial  interest  and  importance  rail- 
ways far  surpass  the  other  agencies  of  transport.  The  crea- 
tion of  the  present  century,  they  have  contributed  largely 
to  promote  its  special  characteristics.  Existing  political 
and  economic  arrangements  depend  for  their  successful 
operation  on  the  modern  railway  system,  supplemented  by 
steamboats  and  telegraphs.  We  need  not  accordingly  be 
surprised  to  find  that  the  principal  financial  problems  of 
the  public  industrial  domain  centre  in  the  treatment  of 
railways.  Every  country  has  had  to  consider  in  what 
mode  it  might  best  utilize  the  invention,  and  in  each  the 
influence  of  national  peculiarities  and  historical  conditions 
has  produced  different  effects.  The  railway  legislation  of 
England,  France,  Germany,  and  the  United  States  affords 
many  interesting  examples  of  this  statement. 

Confining  our  attention  to  the  financial  aspects  of  the 
subject  two  divergent  modes  of  treatment  are  broadly  con- 
trasted 2.  The  policy  of  England  and  the  United  States 
has  been  to  regard  railways  as  merely  one  particular  form 
of  industry  taking  a  place  alongside  of  Banking,  Insurance, 
Shipping,  Mining  or  other  Companies,  but  dependent  for 

1  Bk.  i.  ch.  6.      For   the    economic  and  financial  position  of  canals,  De 
Foville,  La  Transformation  des  Moyens  de  transport,  ch.  7. 

2  For  a  clear  statement  of  the  opposed  methods  see  Cohn,  §  437. 

O  2, 


196  PUBLIC   FINANCE.  [Boos  II. 

any  special  privileges  on  the  direct  exercise  of  the  legisla- 
tive power.  The  railway  company  on  its  first  appearance 
was  regulated  by  enactments  curiously  similar  to  those 
devised  for  the  earlier  turnpike  trusts  and  canal  companies. 
The  liberal  laws  of  the  various  American  commonwealths 
with  reference  to  the  formation  of  companies,  while  giving 
certain  advantages  to  promoters,  were  based  on  the  same 
principle.  Such  a  policy  reduced  the  public  financial 
interest  to  a  minimum.  Railway  companies  were  indeed 
taxed  for  local  purposes  as  any  other  proprietors  of  land 
and  buildings.  A  passenger  duty  intended  to  balance  the 
older  stagecoach  tax  was  imposed  on  them.  Various 
corporation  taxes  were  raised  by  the  American  States, 
lavish  grants  of  land  were  given  to  new  companies,  but  in 
all  other  respects  the  public  powers  and  the  railways  were 
separate.  The  various  changes  of  English  and  American 
legislation  have  not  infringed  on  this  complete  isolation. 
The  restraints  of  the  Intestate  Commerce  Act  and  the 

K, 

Railway  and  Canal  Act  (1888)  have  had  no  financial  aim 
or  effect.  They  are  confined  to  the  field  of  economic 
policy  *. 

1  Continental  countries  have  started  from  a  different  con- 
dition of  things,  and  have  all  been  willing  to  recognise 
a  much  closer  connexion  of  the  State  and  the  railways. 
The  earlier  transport  agencies  had  been  under  state 
direction.  The  carriage  of  passengers  was  one  of  the 
branches  of  the  French  post  before  the  Revolution,  and 
the  administration  of  both  roads  and  canals  had  been 
carried  on  by  a  state  department.  The  German  States 
had  the  same  general  conception  without  the  centralized 
organization  of  France.  There  was  thus  a  predisposing 
cause  for  the  recent  movement  towards  state  railways, 
which  has  been  encouraged  by  the  ablest  theoretical 
writers.  The  direct  action  of  the  State  in  the  construction 
and  working  of  railways  has  been  restrained  by  econo- 

1  An  admirable  account  of  the  variations  of  American  and  English  railway 
policy  in  Hadley,  Railroad  Transportation,  chs.  7  and  9. 


CHAP.  III.]  THE    INDUSTRIAL   DOMAIN.  197 

mical  conditions  too  potent  to  be  set  aside  by  legislation. 
England  was  the  birthplace  of  the  railway,  and  its  mode 
of  procedure  had  some  effect  on  other  countries,  but  the 
principal  check  was  found  in  the  absence  of  sufficient 
capital  for  the  work.  It  was  only  by  severe  pressure  on 
the  English  middle  classes  that  the  rapid  progress  in 
railway  construction  of  the  years  1845-50  was  accom- 
plished J,  and  the  motive  power  was  the  extravagant  hope 
of  gain.  No  such  force  assisted  continental  governments 
in  procuring  funds,  and  they  were  therefore  compelled 
to  fall  back  on  the  support  of  private  companies  whose 
shareholders  were  actuated  by  the  ordinary  economic 
motives. 

/  §  13.  The  different  circumstances  of  the  different  countries 
affected  the  railway  system.  France  with  its  strongly 
unified  government  aimed  from  the  first  at  establishing  a 
well-arranged  series  of  lines  on  a  systematic  plan,  with 
the  reservation  of  the  ultimate  property  in  them  to  the 
State.  /This  course  had  much  to  recommend  it  when 
considered  a  priori.  It  preserved  the  routine  policy  of 
the  administration  as  to  the  older  communications,  and 
it  promised  at  the  end  of  the  periods  of  concession  to 
the  companies  to  add  a  valuable  property  to  the  public 
domain.  The  earlier  concessions  under  the  legislation 
of  1842  were  for  short  periods  not  in  any  instance  ex- 
ceeding forty-five  years.  The  result  was,  however,  to 
hinder  the  investment  of  capital,  and  to  gradually  force 
more  favourable  terms  from  the  Government.  To  en- 
courage the  construction  of  new  lines  a  guarantee  of  inte- 
rest was  given  to  the  older  companies  who  opened  them, 
and  the  time  of  the  concessions  was  extended.  Special 
legislation  was  applied  to  induce  the  construction  of  local 
railways  either  at  the  expense  or  with  the  aid  of  the 
local  governments.  The  war  of  1870-1  and  its  effects 
made  the  improvement  of  the  service  a  matter  of  great 
interest.  In  1878  some  railways  were  acquired  and  worked 

1  Tooke-Newmarch,  History  of  Prices,  v.  367-9. 


198  PUBLIC    FINANCE.  [BOOK  II. 

directly  by  the  State,  and  a  plan  for  the  creation  of 
state  railways  on  a  large  scale  was  proposed.  Owing  to 
the  impossibility  of  procuring  the  necessary  capital  a  new 
arrangement  was  made  with  the  companies  in  1883,  by 
which  the  state  railways  became  only  one,  and  that  the 
least  important,  of  the  seven  groups  into  which  the  main 
lines  are  divided. 

The  financial  results  are  decidedly  unsatisfactory.  The 
surplus  from  the  government  group  after  the  working 
expenses  are  paid  is  small  (for  the  year  1885,  4,257,000 
francs),  and  by  no  means  equals  the  interest  on  capital, 
which  for  the  same  year  (1885)  was  over  40,000,000  francs. 
The  local  lines  are  a  further  charge  on  the  central  and  local 
governments,  as  they  have  been  proved  to  possess  little 
earning  power.  Under  the  various  conventions  between 
1859  and  1883  large  advances  have  been  made  in  the 
form  of  guaranteed  interest,  amounting  for  the  eight  years 
1867— 74  to  ov^rj  290,000,000  francs.  As  these  charges  are 
repayable  out  ot  the  mture  increments  of  value,  they  hav,e 
under  the  newer  system  been  separated  from  the  annual 
Budget  charge  l.  /To  shortly  state  the  outcome  of  French 
railway  policy  on  its  financial  side,  we  may  say  that  as  yet 
the  expenditure  of  the  State  has  been  considerable,  for 
which  the  returns  so  far  have  not  been  a  sufficient  recom- 
pense, but  that  the  method  of  limited  concession  which 
checks  the  development  of  railway  enterprise,  and  almost 
forces  the  State  to  give  subsidies  or  guarantees,  has  the 
advantage  of  creating  a  large  state  property  in  the  future.  / 
The  terms  of  the  six  great  companies  who  possess  the 
main  lines  of  France  all  expire  between  1950  and  1960, 
when  nearly  16,000  miles  of  railway  will  revert  to  the 
State,  besides  the  new  lines  amounting  probably  to  about 
6000  miles  for  which  public  money  is  by  the  arrangement 
of  1883  to  be  gradually  advanced.  The  net  revenue  of  the 
French  lines  for  1887  was  over  500,000,000  francs,  so  that 

1  Say,  Dictionnaire  des  Finances,  991,  s.  v.  « Chemins  de  Fer' ;   Stourm,  Le 
Budget,  257. 


CHAP.  III.]  THE    INDUSTRIAL   DOMAIN.  199 

without  taking  the  prospects  of  increased  revenue  into 
account  there  would  be  an  addition  of  £20,000,000  annually 
to  the  state  resources.  Whether  undue  sacrifices  have  been 
made  for  the  sake  of  this  distant  benefit  is  a  difficult  ques- 
tion to  answer.  We  may  conjecture  that  a  simpler  and 
more  consistent  method  would  have  been  better  for  French 
Finances l. 

§  lA/The  earlier  German  railways  were  developed  chiefly 
by  state  assistance  or  in  some  cases  by  state  construction, 
but  on  no  uniform  plan.  /  Each  of  the  smaller  territories 
formed  its  own  railway  system  to  meet  local  needs,  with- 
out paying  attention  to  the  through  lines  of  communication. 
Prussian  railway  policy  was  somewhat  exceptional.  Private 
companies  were  allowed  to  take  part  in  the  work  of  supply- 
ing needed  lines,  and  guarantees  of  interest  were  given  as 
encouragement.  On  military  grounds  several  railway  lines 
were  constructed  and  worked  by  the  State,  and  thus  a  basis 
was  laid  for  the  later  policy. 

/The  creation  of  the  German  Empire  and  the  unification 
of  its  monetary  and  banking  legislation  could  not  fail  to  in- 
fluence the  position  of  the  means  of  communication.  State 
ownership  and  management  were  decided  on ;/ the  only  ques- 
tion of  difficulty  being  the  determination  of  the  bodies  who 
were  undertake  the  duty.  At  first  the  central  or  Imperial 
government  was  to  have  been  the  owner.  When,  in  deference 
to  the  sentiment  of  the  smaller  States,  this  plan  was  aban- 
doned, the  Prussian  administration  proceeded  to  buy  up  the 
chief  private  lines  and  work  them  by  state  officials.  The 
magnitude  of  this  process,  which  commenced  about  1870, 
may  be  judged  from  the  fact  that  in  the  year  just  mentioned 
thestate-owned  railways  were  about  3,000  miles  against  8,000 
miles  owned  by  private  companies.  In  1889  the  lines  owned 
or  worked  by  the  State  had  13,200  miles  against  1260  miles 
owned  and  worked  by  private  companies.  The  smaller 
States  have  also  purchased  most  of  the  few  private  lines 

1  For  French  railway  policy  Hadley,  ch.  10,  and  the  articles '  Chemins  de  Fer  ' 
in  Say,  Dictionnaire  lies  Finances  and  Dictionnaire  cT  Economic  folitique. 


200 


PUBLIC    FINANCE. 


[BOOK  II. 


in  their  territories.     Hesse  alone  has  a  greater  length  of 
private  than  public  mileage1. 

So  far  as  Prussia  is  concerned  the  financial  results  have 
been  extremely  favourable.  The  prices  paid  for  the  pur- 
chase of  the  several  lines  were  high,  but  nevertheless  there 
has  been  a  good  surplus  in  each  year  after  meeting  all 
expenses  and  paying  interest 2.  The  services  given  to  the 
imperial  post  by  the  railways  form  another  gain,  which  is 
hardly  ascertainable  since  it  is  mixed  up  in  the  postal 
receipts,  which  are  thereby  increased.  To  obtain  a  clear 
revenue  of  over  £5,500,000  is  an  undoubted  proof  of  finan- 
cial success,  though  it  may  partly  be  derived  from  limiting 
the  facilities  for  goods  and  passengers,  and  be  in  fact  a  tax 
on  industrial  activity.  The  great  amount  of  public  debt 
contracted  as  the  purchase  money  of  the  private  lines 
should  be  taken  into  account  in  considering  the  policy  of 
Prussia.  All  pre-existing  debt  makes  the  terms  of  future 
loans  more  onerous,  even  when  there  are  assets  sufficient  to 
meet  the  earlier  charges,  and  it  may  be  that  Prussia's  railway 
debt  will  injuriously  affect  her  credit  should  she  need  it 
for  war. 

|  In  the  smaller  German  States  the  advantages  of  owning 
tne  railway  lines  are  not  so  greatl  In  Baden  the  estimate 
for  1890  assumed  a  surplus  ovler  working  expenses  of 

14,341,000  marks,  while  the  interest  and  sinking  fund  on 
the  railway  debt  was  taken  as  17,091,000  marks.  Wlirttem- 

1  For  the  history  and  present  position  of  the  German  railways,  Wagner,  i. 
707-13  ;  Hadley,  203-8. 

2  The  surplus  over  working  expenses,  the  interest  on  debt,  and  the  net  gain 
for  each  since  1881-2  are  as  follows: — 


Surplus  over 
working  expenses. 

Interest 
on  debt. 

Net  gain. 

MILLION    MARKS. 

MILLION  MARKS. 

MILLION  MARKS. 

1882-3 

138-1 

98-7 

42-4 

1883-4 

147-8 

112 

35'8 

1884-5 

1  86 

I4Q'5 

45  '5 

1885-6 

193-8 

158-6 

35'2 

1886-7 

225-2 

I57-6 

67-6 

1887-8 

273-3 

164-3 

109 

1889-90 

278-5 

165*8 

H3 

CHAP.  III.]  THE   INDUSTRIAL   DOMAIN.  2OI 

berg  is  in  a  similar  situation.  The  net  revenue  for  1889-90 
was  estimated  at  14,500,000  marks  ;  the  interest  on  the  rail- 
way debt  being  15,861,000  marks.  The  Bavarian  railways 
hardly  meet  the  interest  of  their  debt,  and  the  lines  of 
Saxony  just  balance.  The  reasons  for  this  relatively  inferior 
position  are  not  clearly  established.  The  greater  activity 
and  the  wider  area  covered  by  the  Prussian  railroads  pro- 
bably allow  of  more  economical  management  than  can  be 
applied  to  the  smaller  lines.  The  system  of  state  manage- 
ment is  of  longer  standing  in  the  other  States,  and  it  is 
possible  that  sufficient  time  has  not  elapsed  for  a  proper 
judgment  on  ^the  merits  of  the  state  railways  of  Prussia. 
1  §  15.  Both  Austria  and  Hungary  have  in  recent  years 
increased  the  number  of  their  state  lines. )  In  consequence 
of  the  financial  troubles  of  1873  and  to  avoid  the  heavy 
payments  for  guaranteed  interest  several  leading  lines  were 
purchased  by  the  State,  though  more  than  half  remain  in 
the  charge  of  private  companies.  The  surplus  of  the  Aus- 
trian railways  for  1891  is  estimated  at  8,300,000  florins, 
which  does  not  meet  the  interest  on  the  railway  debt. 
The  Hungarian  state  railways  also  have  been  in  an  unsatis- 
factory financial  condition,  the  surplus  for  1891  being  taken 
as  20,200,000  florins,  against  a  much  larger  debt  charge  *. 

I  Belgium  illustrates  perhaps  better  than  any  other  Euro- 
pean country  the  operation  of  state  and  private  railways. 
The  earlier  lines  were  created  by  the  State  with  the  object 
of  developing  the  transit  trade,  for  which  the  country  was 
so  well  suited.  Additional  lines  were  afterwards  constructed 
by  private  enterprise,  which  competed  with  the  state  rail- 
ways and  with  each  other.  To  avoid  this  struggle  a  large 
part  of  the  company-lines  has  been  purchased  by  the 
government,  but  with  the  unfortunate  result  of  reducing 
the  receipts  below  the  profitable  point.  In  1870,  before 
the  era  of  purchase,  the  surplus  was  nearly  20,000,000 
francs,  and  the  interest  on  debt  nearly  13,000,000  francs, 

1  The  new  zone  tariff  policy  of  Hungary  has  improved  the  net  receipts,  but  it 
is  too  soon  to  say  whether  the  improvement  will  be  permanent. 


2O2  PUBLIC    FINANCE.  [BOOK  II. 

giving  a  net  gain  of  almost  7,000,000  francs.  Ten  years 
later  the  surplus  had  risen  to  45,750,000  francs,  but  the 
debt  charge  had  reached  45,795,000  francs,  giving  a  deficit 
of  45,000  francs,  or,  speaking  broadly,  the  total  receipts  and 
expenses  balanced.  By  1883  the  surplus  was  48,500,000 
francs,  the  debt  charge  having  grown  to  52,000,000  francs, 
thus  making  a  deficit  of  4,000,000  francs.  Higher  rates 
were  imposed  as  a  remedy  for  this  evil,  but  in  1888  the 
surplus  was  only  51,700,000  francs,  still  leaving  a  deficit. 

The  experience  of  other  European  countries  in  regard  to 
the  financial  effects  of  state-owned  railways  does  not  ma- 
terially alter  the  conclusions  that  the  cases  already  examined 
suggest.  Holland  and  Italy  (since  1885)  have  preferred  to 
lease  the  state  lines  to  private  companies.  Russia  has  some 
state  railways,  but  for  the  larger  part  of  her  system  gives 
guarantees  of  interest  to  private  companies.  Roumania, 
Norway,  Sweden,  and  Denmark  have  most  of  their  lines 
under  state  ownership,  which  in  the  former  countries  does 
not  give  sufficient  surplus  to  pay  interest  on  capital  charge. 
Spain,  Portugal,  and  Switzerland  have  as  yet  substantially 
adhered  to  the  system  of  private  enterprise  1. 

§  16.  Outside  Europe  the  railways  have  been  mainly 
an  item  of  state  expenditure  to  the  various  governments. 
j  Both  in  North  and  South  America  large  grants  of  land  and 
guarantees  of  interest  have  been  given  as  inducements  to 
the  undertakers  of  railways.^  Brazil  and  Chili  possess  some 
state  lines  which  do  not  pay  the  interest  on  their  capital. 
The  government  lines  of  Canada  in  some  years  have  not 
even  paid  working  expenses;  the  deficit  in  1886  being 
185,000  dollars,  and  1887,  311,000  dollars,  with  the  interest 
on  $50,000,000  capital. 

The  Australasian  colonies  have  entrusted  the  work  of 
railway  construction  to  their  governments,  who  have  bor- 
rowed largely  for  the  purpose.  In  the  year  1887  the  total 
receipts  from  the  Australasian  state  rail  ways  were  £7, 200,000 
and  the  working  expenses  ^4,540,000,  giving  a  surplus  of 

1  In  addition  to  works  already  referred  to,  VonScheel  in  Schonberg,  94-104. 


CHAP.  III.] 


THE   INDUSTRIAL   DOMAIN. 


203 


.£2,660,000.  The  debt  contracted  for  railways  amounted 
to  £95,300,000,  the  interest  on  which  is  about  £4,000,000. 
£1,340,000  would  therefore  represent  roughly  the  expense 
of  the  Australasian  railways  for  the  year  under  considera- 
tion l.  The  Victorian  railways,  however,  show  better  results 
than  the  other  colonial  lines,  especially  since  the  appoint- 
ment of  a  special  board  of  commissioners,  and  the  growth 
of  population  will  in  the  future  largely  increase  the  receipts 
in  all  the  colonies. 

The  Indian  railway  policy  is  financially  interesting  as  a 
further  proof  of  the  readiness  of  English  administrators  to 
adopta  system  quite  different  from  that  of  their  own  country. 
As  in  Australia,  the  State  has  taken  a  great  part  in  the  ex- 
tension of  railway  communications.  The  first  method  was 
that  of  securing  or  guaranteeing  interest  to  private  com- 
panies, under  which  stimulus  some  of  the  main  lines  were 
constructed.  Then  came  the  pressure  of  military  necessities 
and  of  famine  relief.  A  number  of  smaller  and  less  important 
lines  were  established  and  for  the  most  part  worked  by  the 
government.  Finally,  financial  conditions  have  made  it 
desirable  to  return  to  the  guarantee  system,  but  at  a 
lower  rate  of  interest  and  for  a  limited  time.  Though 
the  receipts  from  the  state  railways  are  large  (166,865,000 
rupees  for  1889-90),  the  expenditure  is  still  larger 
(187,131,000  rupees  for  the  same  period),  so  that  if  the 
net  balance  only  be  taken  into  account,  there  is  an 
annual  outlay  for  the  service. 

§  17.  The  statistics  of  state-railway  Finance  have  been 
given  at  some  length  in  order  to  facilitate  the  formation  of 

1  Victorian  Year-Book^  1887-8,  iii.  141.  The  following  table  gives  fuller 
and  more  precise  figures  for  each  Colony: — 


New  South  Wales 
New  Zealand 
Queensland 
South  Australia  . . 
Tasmania     . . 
Victoria        . . 
Western  Australia 

Total 


Receipts. 

Working 
Expenses. 

Surplus. 

Debt. 

£ 

£ 

£ 

£ 

2,285,836 

M57,76i 

828,075 

29,989,750 

990,395 

653,363 

337,032 

13,362,424 

710,458 
674,419 

534,38i 
409,128 

176,077 
265,291 

13,127,799 
10,891,728 

53.°74 

80,752 

-27,678 

1,771,928 

2,453,345 
41,104 

I<363,587 
47,712 

1,089,758 
-6,608 

25,413,206 
816,147 

7,208,631 

4,546,684 

2,661,947 

95,372,982 

2C»4  PUBLIC   FINANCE.  [BOOK  II. 

a  correct  judgment  on  the  system.  Within  the  last  twenty 
years  the  movement  towards  *  railway  nationalization  '  has 
been  increasing  in  force,  and  though  the  grounds  on  which  it 
has  to  be  decided  belong  mainly  to  economic  policy  in  the 
widest  sense,  financial  considerations  cannot  be  altogether 
neglected.  (vThe  one  conspicuous  success  of  state-managed 
railways  is  found  in  Prussia,  of  which  the  minor  German 
States,  as  Cohn  allows  *,  fall  very  far  short,  j  France  and 
Belgium  in  recent  years  have  not  profited  financially  from 
their  state  lines.  Those  of  Australasia  and  Canada  afford  on 
the  whole  no  direct  addition  to  the  public  revenues,  a  state- 
ment which  is  also  true  of  India. 

[  If  the  question  be  determined  on  these  definite  facts  the 
conclusion  ought,  we  believe,  to  be  against  state  property 
in  railways.  \  Many  other  considerations  are  however  to  be 
taken  into  account.  (Advocates  of  state  property  dwell  on 
the  future  increases  from  the  growing  movements  of  both 
persons  and  goods,  and  regard  construction  or  purchase  as 
a  profitable  investment  for  the  futureA  Transport  agencies 
act  powerfully  in  the  promotion  of  industrial  and  commer- 
cial development,  and  hence  it  is  argued  that  even  unremu- 
nerative  lines  may  so  benefit  the  community  as  to  increase 
the  productiveness  of  other  sources  of  revenue.)  Again,  unity 
of  management,  only  to  be  obtained  under  the  State,  would 
reduce  working  expenses  and  leave  a  larger  surplus  as  net 
profit.  The  superiority  of  state  credit  is  alleged  as  another 
reason  for  believing  that  its  ownership  would  be  financially 
successful.  1  The  English  government  could  some  years  ago 
borrow  at  3j°/0  (and  now  at  less  than  3%),  and  buying 
up  the  railway  shareholders'  interests  at  their  market  value 
would,  it  is  supposed,  secure  for  itself  the  difference  between 
the  return  on  railway  shares  and  that  on  Consols.  By  an 
extensive  investment  of  borrowed  capital  a  margin  of  profit 
would  be  obtained  for  the  discharge  of  other  public  services. 

1  'Die  anderen  deutschen  Staaten  sind  Preussen  (sofern  sie  nicht  vorange- 
gangen)  in  der  Richtung  der  Staatsbahnpolitik  gefolgt,  haben  freilich  nicht 
ebenso  giinstige  finanzielle  Ergebnisse  aufzuweisen,'  §  439. 


CHAP.  III.]  THE    INDUSTRIAL   DOMAIN.  205 

\The  objections  to  such  a  policy  are  obvious  enough.  There  is 
no  financial  reason  for  investment  in  railroads  that  might 
not  be  applied  to  other  forms  of  industry.  If  the  advan- 
tages of  unified  management  are  important,  the  dangers  of 
attempting  to  deal  with  a  varied  and  complicated  business 
are  grave.  ^Railway  nationalization  as  a  financial  measure 
is  open  to  the  risks  that  attend  similar  proposals  for  land 
nationalization.  Without  accepting  Jevons'  view  that  the 
supposed  gain  from  purchase  through  the  higher  credit  of 
the  State  is  wholly  a  fallacy  1,  it  is  certain  that  it  depends 
on  a  series  of  events  which  are  uncertain  and  incalculable. 

/Depression  in  trade,  appreciation  of  the  standard  of  value, 
or  new  inventions,  would  reduce  very  much  the  value  of  the 
fixed  capital  of  the  railway  system.  The  policy  of  state 
acquisition  exposes  the  public  finances  to  all  the  chances  of 
loss  that  these  possibilities  open  up.  /At  best  the  system 
of  state-owned  and  managed  railways  thus  appears  to  be 
a  speculative  employment  of  financial  resources,  and  judged 
in  the  light  of  experience  to  be  of  more  than  doubtful  ad- 
vantage to  the  Exchequer.  The  general  difficulties  of  state 
industrial  enterprise  are  besides  likely  to  occur  in  this  as 
in  other  cases.  The  defective  accounts  of  capital  and 
revenue,  expenditure  and  receipts  cannot  be  escaped  any 
more  than  in  the  dockyards  or  arsenals.  With  the  best 
intentions  it  is  not  easy  to  distinguish  clearly  between  the 
source  and  application  of  the  different  funds  that  railway 
administration  has  to  deal  with,  and  yet  to  get  a  perfectly 
trustworthy  statement  of  the  financial  position  of  state 

1  '  If  the  State  manages  the  railways  just  with  the  same  degree  of  skill  and 
success  as  the  Companies  there  would  then  be  no  gain  or  loss ;  if  better,  there 
would  be  gain  accruing,  not  from  good  credit,  but  from  good  management ; 
if  worse,  there  would  be  certain  loss.  Thus,  in  theory,  the  use  of  the  public 
credit  proves  to  be  a  pure  fallacy,  and  if  it  were  not  so  there  would  be  no 
reason  why  the  Treasury  should  not  proceed  to  invest  money  in  many  kinds 
of  industrial  enterprises  besides  railways  and  telegraphs,'  Methods  of  Social 
Reform,  371.  The  fact  that  the  chance  of  loss  is  usually  overestimated  is  here 
neglected.  Jevons  would  be  right  if  the  same  income  as  formerly  were  to  be 
secured  to -shareholders,  but  the  suggestion  is  that  only  the  market  value  of 
the  shares  should  be  given. 


2O6  PUBLIC  FINANCE.  [BOOK  II. 

railways  is  essential  for  a  correct  judgment  on  the  policy 
that  has  created  them. 

§  18.  What  the  railway  system  is  to  the  nation,  tramways 
are  to  the  town,  and  therefore  it  is  quite  in  accordance  with 
the  general  course  of  policy  that  tjiere  should  be  an  effort 
to  '  municipalize '  these  means  of  communication.  English 
legislation  places  local  governments  in  an  exceptionally 
favourable  position,  either  for  establishing  tramways  them- 
selves, or,  after  the  expiration  of  a  period,  purchasing  the 
rights  of  companies.  Several  leading  British  towns  own 
their  local  lines,  but  are  obliged  to  lease  them  to  a  con- 
tractor for  working.  Nearly  £3,000,000  of  capital  has  been 
applied  to  this  object  by  about  thirty  towns.  In  the  United 
States  '  a  few  municipalities  manage  their  own  street-car 
lines ' 1,  but  the  number  is  small. 

Though  classed  in  accordance  with  their  nature  among 
the  industries  of  transport,  the  tramways  resemble  in  their 
economic  and  financial  aspects  the  other  industries  discussed 
in  an  earlier  part  of  the  chapter. 

V  §  19.  The  proper  administration  of  the  railway  system, 
assuming  it  to  be  owned  by  the  State,  is  a  further  problem.  | 
Shall  the  lines  be  leased  to  a  company,  as  in  Holland,  or 
be  managed  directly  by  state  officials  ?  The  former  seems 
the  solution  that  offers  the  greatest  financial  advantages. 
The  full  value  of  the  line  can  be  obtained  and  the  chance  of 
loss  in  a  great  measure  avoided.  Unfortunately  the  objects 
for  which  state  railways  are  often  desired  cannot  be  accom- 
plished in  this  way.  The  lessees  will  doubtless  use  their 
privilege  to  gain  the  highest  possible  returns,  and  the  evils 
of  competition  and  unfair  rates  will  continue. 

State  administration  is  so  much  desired  by  the  opponents 
of  private  companies  that,  as  in  Germany,  private  lines  are 
leased  to  the  State.  In  this  way  the  great  outlay  of  capital 
is  not  required,  and  as  the  management  of  a  railway  line 
may  be  reduced  to  a  system  of  routine,  there  at  first  appears 
to  be  a  fair  analogy  with  the  post  office.  This  resemblance 

1  Ely,  Taxation,  270. 


CHAP.  III.]  THE   INDUSTRIAL    DOMAIN.  207 

is  only  apparent.  Instead  of  the  simple  tariff  and  limited 
classes  with  which  the  Post  Office  deals,  there  must  be  very 
elaborate  classes  and  frequent  adjustment  to  new  conditions. 
The  management  of  a  great  railway  is  an  industrial  'under- 
taking '  of  peculiar  difficulty,  and  is  almost  certain  to  suffer 
from  the  want  of  capable  direction.  The  financial  success  of 
state-managed  railways  will  be  affected  by  the  efficiency  of 
the  management  of  so  complicated  a  business,  and  it  is 
more  than  doubtful  whether  the  gain  through  unity  of 
direction  and  system  will  compensate  for  the  lack  of  energy 
and  zeal  that  state  industries  display. 

A  great  deal  will  depend  on  the  particular  constitution 
and  situation  of  the  country.  The  good  financial  results  of 
the  Prussian  railroads  are  attributed  to  the  skill  and  care  of 
the  trained  officials  in  the  service  of  that  State.  Countries 
where  the  public  service  is  not  so  well  organized  and  with 
Governments  more  subject  to  popular  control  cannot  hope 
for  equal  success.  *  I  tremble  to  think/  said  Jevons,  *  whati 
might  be  the  financial  results  if  a  property  exceeding  the 
national  debt  in  nominal  value  and  requiring  in  every  part 
of  it  constant  repairs,  renewals,  and  extensions  were  in  the 
hands  of  a  Parliamentary  minister  who  might  find  some 
day  that  he  had  been  illegally  and  ignorantly  signing 
away  great  sums  of  money  at  the  bidding  of  his  subor- 
dinates1'. 

(The  financial  working  of  the  system  would  be  particu- 
larly exposed  to  danger;  for  in  addition  to  the  risk  of 
of  errors  in  management  there  would  be  the  pressure  of 
opinion  in  favour  of  low  fares  and  rates.  )lf  a  substantial 
surplus  were  realized  in  any  year  it  would  be  impossible  to 
escape  reductions  that  would  effectually  prevent  its  recur- 
rence. Victorian  experience  is  instructive  on  this  point. 
Any  increases  in  the  gross  receipts  of  the  Colonial  lines 
have  been  *  absorbed  by  the  additional  working  expenses ' 
due  to  extra  facilities  and  lower  rates.  The  Railway  Com- 
missioners declare  that  '  No  department  controlling  state- 

1  Methods  of  Social  Reform,  359. 


208  PUBLIC   FINANCE.  [BOOK  II. 

owned  railways  can  expect  to  be  allowed  to  realize  more 
than  a  small  margin  beyond  the  amount  required  to  pay 
the  interest  upon  the  capital  invested,  as  immediately  that 
point  has  been  reached  the  public  request  and  insist  upon 
concessions  in  rates  or  increased  facilities,  both  of  which  are 
practically  an  amelioration  of  taxation.' l  It  remains  to  be 
seen  whether  Prussia  will  succeed  in  maintaining  her  high 
revenue  from  railways  when  once  a  movement  for  remission 
of  taxation  sets  in.  Cohn,  for  example,  justifies  the  railway 
surplus  on  the  ground  that  it  is  derived  from  the  well-to-do 
classes,  and  makes  the  distribution  of  public  burdens 
fairer,  but  if  the  duties  on  commodities  of  general  use,  which 
are  so  heavy  in  Germany,  were  modified,  the  claim  for  lower 
railway  charges  could  not  be  met  in  this  way  -. 
l\  The  question  of  compensation  for  loss  is  another  of  the 
financial  points  in  railway  administration.^  State  post 
offices  escape  the  difficulty  by  repudiating  all  responsi- 
bility, no  matter  what  the  loss  they  inflict,  but  railways 
could  not  follow  this  most  objectionable  method.  Over  a 
large  system  it  is  probable  that  the  cost  of  accidents  and 
other  losses  could  be  averaged  from  year  to  year,  though 
some  variation  would  still  occur.  Smaller  countries  would 
not  have  this  refuge  from  loss.  A  single  heavy  accident 
would  damage  the  balance  and  turn  profit  into  loss.  The 
Victorian  railways  had  for  a  single  accident  to  pay  claims 
to  the  amount  of  £128,988  ;  but  the  total  expenditure  under 
that  head  for  the  year  in  question  (1887-8)  only  amounted 
to  £142,562,  while  for  the  preceding  year  it  was  but  £6655. 
It  is  moreover  highly  probable  that  if  the  amount  of  com- 
pensation was  assessed,  as  at  present  in  England  by  juries, 
their  bias  would  be  altogether  against  the  railway  adminis- 
tration and  to  a  greater  extent  than  it  is  at  present  against 
private  companies. 

§  20.  One  difficulty  common  to  most  forms  of  state  in- 
dustry arises  from  the  necessity  of  dealing  with  large 
numbers  of  employees.  The  tasks  of  the  modern  State  are 

1    Victorian  Year-Book,  1887-8,  ii.  139.  2  Cohn,  §§  440-1. 


CHAP.  III.]  THE    INDUSTRIAL   DOMAIN.  2OQ 

sufficiently  varied  and  comprehensive  to  take  up  all  the 
ability  and  time  of  administrators  without  adding  unneces- 
sarily to  their  duties.  Public  industries,  however,  require 
for  their  efficient  working  a  body  of  organized  hands, 
obtained  by  free  contract.  The  unavoidable  consequence 
is  the  possibility  of  disagreement  between  the  State  and  its 
helpers,  culminating  perhaps  in  the  last  weapon  of  industrial 
war — strikes 1.  The  position  of  the  public  powers  is  in  such 
cases  a  trying  one.  The  agency  that  is  bound  to  enforce 
order  and  fair-play  is  one  of  the  parties  to  the  dispute  ;  the 
natural  disposition  of  an  administrator  in  a  popular  govern- 
ment is  to  make  things  smooth  by  yielding  to  the  demands 
of  the  discontented,  a  course  that  involves  additional  expense 
and  injuriously  affects  the  financial  position.  The  pressure 
of  the  consumer — that  is  the  community — for  low  rates,  and 
that  of  state  officials  for  better  conditions  of  service,  is  the 
most  serious  financial  risk  that  the  industrial  activity  of  the 
State  is  likely  to  encounter.  The  Prussian  railway  service 
controls  its  80,000  employees  on  an  almost  military  system, 
aided  by  the  organization  of  the  national  army.  But  any 
attempt  to  direct  the  railway  system  of  the  United  Kingdom 
on  a  similar  plan  would  be  hopeless. 

§  21.  But  whatever  be  the  judgment  that  we  form  as  to 
the  expediency  of  the  policy,  there  can  be  little  doubt  that 
it  has  had  important  effects  on  public  Finance.  In  most 
European  States  a  new  branch  of  the  public  domain  has 
been  called  into  existence,  with  very  large  gross  receipts. 
The  weight  of  public  indebtedness  has  moreover  been  in- 
creased, and  the  real  nature  and  results  of  that  burden  have 
been  obscured  2.  A  large  section  of  private  industry  that 
would  otherwise  contribute  to  the  public  resources  through 
taxation  has  come  into  the  charge  of  the  State.  The 
broader  social  and  political  results  do  not  concern  us 

1  That  this  is  not  an  imaginary  danger  is  proved  by  the  fact  that  in  July 
1 890,  there  were  '  strikes  '  at  the  municipal  gasworks  in  Leeds,  at  the  London 
Post  Office,  and  in  the  Metropolitan  Police,  and  also  a  '  mutiny'  in  the  Guards  ! 

2  Bk.  v.  ch.  5  on  the  so-called  '  reproductive '  debt. 

P 


2IO  PUBLIC    FINANCE.  [BOOK  II. 

here.  (But  the  purely  financial  consequences  of  a  con- 
tinuance of  the  movement  have  much  interest.^  One 
inevitable  result  will  be  the  comparative  reduction  of 
tax-revenue  as  contributing  to  the  gross  receipts.  The 
addition  of  English  railway  expenditure  and  receipts  to 
the  National  Budget  would  nearly  double  its  already 
portentous  sum  1. 

Under  such  conditions  the  ordinary  method  of  inter- 
preting financial  returns  would  prove  defective.  At  present 
the  Post  Office  unduly  affects  the  balance  of  the  Budget, 
but  its  effect  is  insignificant  compared  with  accounts  of 
the  magnitude  of  the  railways.  The  Indian  Budget,  as 
Fawcett  very  clearly  showed  2,  is  open  to  misinterpretation 
on  this  ground.  Until  the  gross  and  net  figures  are 
separated  and  arranged,  there  are  no  correct  data  for  dis- 
cussing the  financial  situation.  t 
V_Of  more  weight  is  the  fact  that  this  great  increase 
of  gross  receipts  and  expenditure  would  leave  the  real 
power  and  burdens  of  the  country  almost  unchanged.  The 


1  The  railways  of  the  United  Kingdom  show  the  following  results  for  the 
year  1889:  — 

Receipts  from  all  sources  £77,025,017 
AVorking  Expenditure  .  £40,094,116 
Net  Receipts  .  .  £36,930,901 

Paid-up  Capital      .         .       £3  76, 595,1 66 
The  gross  public  revenue  for  the  year  ending  March  3 1  st,  1 890  was 

£89,304,316 

The  total  expenditure      .  £86,083,314 

The  National  Debt  at  the  end  of  the  year  was          .         .       £684,954,150 
The  charge  of  the  debt  for  the  same  year,  including  redemption 

£24.749,659 

The  inclusion  of  the  railway  accounts  in  the  Budget  would  raise  the  receipts 
to  over  £166,000,000  and,  taking  the  present  railway  net  receipts  to  be  capi- 
talized at  4  per  cent.,  the  total  expenditure  to  £163.000,000,  and  the  Public 
Debt  to  about  ,£1,600,000,000.  If  the  now  standard  2f  per  cent,  stock  were  to 
be  given,  the  capital  should  be  proportionally  increased  or  severe  loss  inflicted 
on  the  shareholders  who  had  invested  in  the  assurance  of  being  undisturbed. 
The  establishment  of  a  sinking  fund  in  the  same  proportion  as  that  applied 
in  various  forms  to  the  present  debt  would  necessitate  increased  taxation  unless 
state  management  proved  very  much  more  economical. 
3  Indian  Finance,  17-25. 


CHAP.  III.]  THE    INDUSTRIAL   DOMAIN.  211 

Finances  might  be  a  little  better  or  a  little  worse  accord- 
ing as  there  was  a  net  gain  or  loss  from  the  new  state 
domain,  but  in  substance  the  public  wants  would  still  have 
to  be  met  from  taxation,  and  the  pressure  would  fall 
on  private  income,  since  the  large  revenues  from  quasi- 
private  possessions  would  have  corresponding  charges 
against  them.  ) 

/  The  system  of  creating  a  state  industrial  domain  by  the 
policy  of  granting  long  concessions  with  ultimate  reversion 
to  the  State  is  by  far  the  most  plausible.  It  appears  to  be 
a  form  of  saving  by  securing  advantages  in  the  distant  future 
at  a  small  present  sacrifice.  )  For  we  cannot  believe  that  the 
concessionaries  do  not  endeavour  to  compensate  themselves 
for  their  shorter  term  by  increased  charges,  the  result  .of 
limitation  of  advantages.  Such  is  apparently  the  case  in 
France,  where  the  railway  companies,  if  their  tenure  is 
limited,  derive  a  counter  advantage  from  the  very  high 
dividends  guaranteed  to  them. 

From  one  point  of  view  the  formation  of  a  state  property 
may  be  regarded  as  a  process  of  saving  somewhat  analogous 
to  the  treasures  accumulated  by  sovereigns  in  earlier  times. 
A  long-continued  process  of  judicious  investment  might 
succeed  in  raising  these  accumulations  to  a  very  large 
amount,  but  under  modern  conditions  it  is  better  to  trust  to 
taxation  for  the  needed  revenues,  and  allow  the  investment 
of  capital  to  proceed  from  the  action  of  individuals.  It 
may  be  further  remarked  that  each  extension  of  state 
ownership  and  management  is  a  step  in  the  direction  of 
Socialism.  That  the  growth  of  public  industries,  if  carried 
on  unchecked,  would  ultimately  transform  society  into  the 
type  desired  by  the  more  thoughtful  socialists,  is  undeniable; 
and  whatever  may  be  the  merits  of  this  kind  of  social 
organization,  it  is  utterly  incompatible  with  the  continuance 
of  the  conditions  which  existing  financial  theories  assume. 
During  all  changes  of  social  life  the  fundamental  economic 
and  financial  categories  will  survive,  but  their  form  may  be 
so  changed  as  to  render  entirely  new  expositions  essential. 

P  2 


212  PUBLIC    FINANCE. 

We  are  not  called  on  to  discuss  socialistic  proposals,  but,  to 
all  who  recognise  their  impracticability,  the  encouragement 
to  Socialism  that  attends  the  extension  of  the  industrial 
domain  of  the  State  may  be  noted  as  a  further  objection 

\vto  !t. 


CHAPTER   IV. 

THE  STATE  AS  CAPITALIST.    ADMINISTRATIVE 
REVENUE. 

§  1.  THE  agricultural  and  industrial  property  of  the 
State,  though  the  former  has  lost  most  of  its  importance, 
and  the  latter  is  confined  to  particular  sections  of  industry, 
have  both  retained  a  place  as  substantial  sources  of  revenue 
in  the  case  of  at  least  some  countries.  The  domain,  the 
forests,  and  the  railways  of  Prussia  contribute  a  consider- 
able amount  to  the  budget  and  cannot  be  passed  over. 
The  land  revenues  of  India  are  the  mainstay  of  the  Finances 
of  that  country,  and  England  would  feel  the  loss  of 
the  postal  revenue.  Very  different  is  the  position  of  what 
once  might  have  been  regarded  as  a  co-ordinate  part 
of  the  quasi-private  income  of  the  State,  viz.  the  revenue 
from  commerce.  At  one  time  the  regulation  and  even  the 
monopoly  of  certain  branches  of  trade  was  believed  to  be 
a  part  of  the  royal  prerogative.  This  position,  which  was 
most  strongly  held  in  the  sixteenth  century,  gave  way 
before  the  pressure  of  new  economic  forces  and  the  criti- 
cisms of  the  more  intelligent  theorists.  It  is  now  univer- 
sally recognised  that,  to  use  Adam  Smith's  words,  '  no 
two  characters  seem  more  inconsistent  than  those  of  trader 
and  sovereign l '.  The  speculative  nature  of  commerce, 
the  need  for  constant  watchfulness  and  minute  calculation 


214  PUBLIC    FINANCE.  [BOOK  II. 

of  the  chances  of  gain  or  loss  which  are  its  essential  features, 
make  it  impossible  for  a  State  to  hope  for  revenue  by 
engaging  in  it. 

The  exceptions  to  this  general  rule  are  rather  apparent 
than  real.  'When  a  State  possesses  and  works  lands,  forests, 
mines  or  factories — unless  the  products  are  used  in  the 
state  service — it  must  find  a  market  for  what  it  turns  out, 
but  even  this  irreducible  t  minimum  of  commercial  trans- 
actions is  the  weakest  part  of  state  economy,  and  by  its 
risks  forms  an  additional  objection  to  those  already  urged 
against  increasing  public  lands  or  industries.  The  same 
necessity  of  course  exists  where  an  article  is  artificially 
monopolized  for  the  purpose  of  effectual  taxation,  a  pro- 
cess that  is  sometimes  confined  to  the  sale,  leaving  the 
production  to  private  enterprise.  Such  revenue  as  is 
obtained  in  this  mode  is  virtually  taxation  on  the  com- 
modities so  dealt  with,  and  must  be  considered  in  that 
connexion.  The  only  other  exception  that  we  need 
notice  is  that  of  the  Dutch  government  trade  from  Java. 
Under  the  '  culture  system  '  large  quantities  of  valuable 
products,  chiefly  coffee,  tea  and  spices,  are  received  by  the 
Colonial  government  and  sold  at  a  high  rate.  For  many 
years  large  surpluses  were  realized,  but  lately  the  modifica- 
tions of  the  culture  system  and  the  fall  in  prices  have  led 
to  deficits  in  the  colonial  budget,  and  given  still  further 
proof  of  the  hazardous  nature  of  such  revenues  ]. 

§  2.  The  business  of  banking  is  in  so  many  ways  connected 
with  the  State  that  its  public  management  appears  to  have 
much  to  recommend  it.  The  ordinary  method  has,  how- 
ever, been  that  of  granting  concessions  to  privileged 
companies  who  are  bound  to  afford  facilities  to  the  State 
in  return  for  advantages  enjoyed.  England,  France  and 
Germany  at  present  adopt  this  policy,  with  the  various 
modifications  that  the  circumstances  of  each  country  make 
advisable.  The  pure  '  state-bank '  in  which  the  capital 

1  The  Dutch  policy  in  Java  is  too  favourably  described  by  Wallace,  Malay 
Archipelago,  chs.  7  and  17  ;  cp.  Wagner,  i.  626-7. 


CHAP.  IV.]  THE   STATE   AS   CAPITALIST.  215 

of  the  undertaking  is  supplied  from  the  public  funds  is 
found  only  in  Russia  and  Sweden.  In  most  countries 
banks  contribute  to  the  revenue  either  by  the  special  ser- 
vices that  they  perform  for  the  State,  by  taxation,  or  by 
sharing  profits  over  a  certain  point  with  the  Treasury,  the 
last  being  the  system  of  the  German  Imperial  bank  1. 

Banking  may  naturally  be  divided  into  (i)  dealings  with 
money,  and  (2)  with  capital.  There  are  strong  reasons 
for  regarding  the  former  as  a  state  function,  and  it  is 
probably  from  this  part  of  the  business  that  public  revenue 
may  best  be  obtained  2.  The  trade  in  capital  on  the  other 
hand  seems  entirely  unfit  for  governmental  intervention, 
though  some  small  revenue  may  be  gained  from  it  by 
judicious  taxation. 

The  relations  of  Public  Finance  with  the  banking  system 
are  not  confined  to  questions  of  revenue.  The  public 
debt  in  its  different  forms,  especially  that  of  inconvertible 
paper  issue,  is  mixed  up  with  the  trade  in  capital,  and  the 
whole  mechanism  of  the  financial  system  is  dependent  for 
its  successful  operation  on  the  agencies  of  credit.  We 
shall  therefore  have  more  than  once  to  return  to  the 
subject  3. 

Another  form  of  state-banking  has  come  into  existence 
in  .the  last  thirty  years,  in  the  savings  bank  which  origin- 
ated in  England  in  1861,  and  has  extended  to  Belgium, 
Italy,  Holland,  France.  Austria  and  Sweden  ;  but  its 
financial  importance  is  confined  to  the  aid  which  the  large 
deposits  afljprd  on  the  creation  of  terminable  annuities. 

§  3.  A  more  important  but  at  the  same  time  more 
questionable  source  of  revenue  is  by  many  States  derived 
from  the  receipts  of  lotteries  conducted  by  the  government. 
The  tendency  of  the  State  to  seek  gain  from  the  errors  or 

1  The  Imperial  Bank  of  Germany  appears  as  an  annual  contributor  to  the 
Budget,  the  estimate  for  1890-1  being  1,383,500  marks. 

2  Cp.  Ricardo's  '  Plan  for  the  Establishment  of  a  National  Bank,'  where  the 
two  branches  of  banking  are  carefully  distinguished,  Works,  503-12. 

3  For  inconvertible  issues  as  a  form  of  loan  see  Bk.  v.    ch.   6,  and  for  the 
relation  of  the  Treasury  to  Banks  see  Bk.  vi.  chap.  3. 


2l6  PUBLIC    FINANCE.  [BOOK  II. 

vices  of  its  subjects  is  very  noticeable  in  the  earlier  periods 
of  financial  history.  Appeals  were  often  made  to  men's 
'  absurd  presumption  in  their  own  good  fortune '  by  the 
establishment  of  periodical  lotteries,  in  which  the  con- 
tributors taken  as  a  whole  were  certain  to  lose.  In  many 
cases  the  lottery  became  a  state  monopoly,  and  several 
examples  still  exist.  The  Prussian  budget  estimate  for 
1890-1  assumes  a  net  yield  of  8,291,500  marks  from  'this 
source.  The  Austrian  state  lottery  was  estimated  to  give 
21,500,000  florins  in  1889.  Italy  is  the  receiver  of  the 
largest  revenue  from  lotteries,  the  gross  yield  for  1889-90 
being  computed  at  76,300,000  lire.  Saxony,  Hamburg, 
Spain  and  Hungary  are  also  indebted  to  this  system  for 
portion  of  their  revenues.  The  objections  are  rather  moral 
than  economic,  though  the  virtues  weakened  by  the  pre- 
valence of  gambling  are  the  peculiarly  economic  ones  of 
prudence  and  willingness  to  acquire  wealth  by  labour. 

From  the  purely  financial  point  of  view,  the  more  refined 
lottery  systems  depending  on  combinations  of  numbers 
are  objectionable,  as  there  is  some  uncertainty  as  to  their 
gains.  The  State  is  exactly  in  the  position  of  the  banker 
of  the  gambling  table.  Thus  1885  was  a  bad  year  for 
the  Italian  lottery,  1886  a  good  one.  The  simple  method 
of  prizes  arranged  in  classes  is  preferable,  but  it  appeals 
less  powerfully  to  the  spirit  of  adventure,  on  the  prevalence 
of  which  the  institution  depends  for  its  continuance. 

The  pernicious  effects  of  state  sanction  of  the  vice  of 
gambling  have  led  to  the  abandonment  of  the  lottery 
system  in  England  (1826),  Hesse  (1832),  France  (1836), 
Sweden  (1840),  Bavaria  (i  86 1),  and  Switzerland  (1865),  and 
Prussia  seems  likely  soon  to  follow  the  example  thus  set. 

§  4.  Adam  Smith  has  made  the  institution  of  a  '  public 
pawnshop '  familiar  by  his  reference  to  the  case  of  Ham- 
burg, and  many  similar  establishments  in  the  shape  of  the 
'  monts  de  piete*  in  France,  Belgium  and  some  German 
States  are  in  existence.  The  proceeds  when  they  exceed 
the  advances  and  cost  of  working  are  not  applied  to  public 


CHAP.  IV.]  THE   STATE   AS   CAPITALIST.  21 7 

use,  so  that  the  whole  system  is  rather  a  charge,  chiefly  on 
municipal  revenues. 

A  priori  it  would  seem  that  the  lending  of  accumulated 
wealth  would  be  a  convenient  mode  of  securing  a  revenue 
for  the  public  services,  but,  as  in  the  case  of  industrial 
investments,  the  test  of  experience  makes  it  plain  that  this  / 
is  really  an  expensive  way  of  obtaining  the  necessary  V[ 
supplies,  since  the  principal  has  first  to  be  raised  and  is 
afterwards  less  productively  employed  than  when  left  in 
the  ownership  of  private  persons.  A  true  conception  of 
the  relation  of  state  income  to  the  national  income,  which 
is  the  sum  of  all  private  incomes  within  the  nation,  over- 
throws the  fallacy  of  state  accumulation  and  investment. 

Notwithstanding  the  force  of  this  general  canon,  the 
financial  accounts  of  modern  states  exhibit  apparently 
many  examples  of  advances  of  capital  by  the  State.  On 
investigation  these  cases  turn  out  be  connected  with  the 
use  of  public  credit.  For  the  furtherance  of  certain 
economic  or  social  ends,  as  e.  g.  the  improvement  of  land,  or 
the  erection  of  better  dwellings  for  workmen,  or  municipal 
improvements,  advances  are  made  by  the  central  govern- 
ment either  to  individuals  or  local  bodies,  but  these  loans 
are  themselves  ultimately  derived  from  private  capital  by 
means  of  the  public  credit.  The  Treasury  acts  simply  as 
an  intermediary  in  supplying  capital  for  certain  desirable 
objects — a  position  made  clearer  in  England  by  Mr. 
Goschen's  separation  of  the  local  from  the  general  debt. 
The  repayment  of  the  money  so  advanced  is  but  the 
appropriate  method  of  discharging  the  amount  of  debt 
that  was  contracted  for  the  original  loans. 

§  5.  The  interest  on  capital  lent  out  is  thus  not  a  source 
of  state  revenue  that  need  receive  attention  here  since  it 
does  not  really  increase  the  public  receipts.  We  may  there- 
fore pass  on  to  consider  those  kinds  of  revenue  that  are 
fixed  in  amount  and  admit  of  capitalization,  a  circumstance 
that  connects  them  with  the  gains  from  invested  capital, 
notwithstanding  that  their  origin  is  very  different. 


2l8  PUBLIC    FINANCE.  [BOOK  II. 

Foremost  among  such  revenue  is  the  gain  from  charges 
on  land.  In  an  earlier  chapter  of  the  present  Book  we 
found  that  the  agricultural  domain  had  often  passed  gradu- 
ally from  the  hands  of  the  sovereign  by  the  introduction  of 
hereditary  leases.  Permanency  of  tenure  without  limita- 
tion of  rent  is  of  little  benefit,  as  increase  in  the  charge  can 
always  be  used  to  destroy  the  tenant's  interest.  Con- 
sequently the  fixing  for  ever  or  for  a  long  term  of  the  rent 
to  be  paid  accompanies  the  hereditary  lease.  The  variable 
payments  become  settled  and  definite  charges. 

In  another  way  the  same  form  of  revenue  comes  into 
existence.  The  servile  tenures  of  the  Middle  Ages  pre- 
scribed a  great  variety  of  duties  to  be  performed  by  the 
tenants,  which  under  the  new  conditions  of  *  money  economy ' 
were  commuted  into  fixed  sums.  English  legislation  on 
copyholds,  the  measures  of  the  French  Constituent  As- 
sembly, and  the  Prussian  land  legislation  since  1807,  have 
all  had  this  commutation  and  settling  of  dues  as  one  of 
their  objects.  The  tithes,  so  peculiarly  distinctive  of  eccle- 
siastical property,  have  also  undergone  the  same  treatment, 
wherever  they  have  not  been  abolished.  The  universality 
of  the  forces  that  work  this  change  is  shown  by  the 
extension  of  the  terms  of  the  Indian  land  settlements  and 
the  favour  in  which  perpetual  settlements  are  held.  The 
difficulties  as  to  the  distinction  between  rent  and  taxation 
in  India  have  been  already  noticed,  as  also  that  with  a 
perpetual  settlement  the  state  receipts  are  in  reality 
neither  \ 

A  still  further  question  arises,  viz.  whether  long-continued 
taxes  on  land  should  not  be  included  in  this  class  of  re- 
ceipts. Much  controversy  has  arisen  in  connexion  with 
the  French  Impot  Fonder  ;  one  party  contending  that  its 
burden  has  ceased  to  be  felt,  since  all  purchasers  deducted 
the  capitalized  amount  of  the  tax  from  the  purchase  money ; 
opponents  of  this  view  have  brought  forward  the  ever  open 
possibility  of  changes  in  the  amount  so  levied.  The  broader 
1  Bk.  ii.  ch.  2.  §  2. 


CHAP.  IV.]  THE   STATE   AS   CAPITALIST.  2 19 

theoretical  aspects  of  the  matters  at  issue  will  occupy  us  in 
studying  taxation,  when  we  shall  see  reason  for  adopting 
the  last- mentioned  view,  but  some  concession  can  be  made 
to  the  advocates  of  the  rent  charge  conception  of  land 
taxes.  Where  as  in  the  case  of  the  English  Land  Tax  of 
1692  (originally  intended  to  include  all  property,  but  evaded 
by  the  holders  of  movable  wealth)  the  amount  is  fixed  on 
each  estate,  it  does  become  a  charge  on  the  land.  The 
system  of  redemption,  applied  first  in  1798,  is  of  itself 
sufficient  to  prove  the  correctness  of  this  view.  The  so- 
called  '  English  Land  Tax '  is  gradually  disappearing. 
From  its  highest  point  of  £1,911,663  in  1798,  it  has  come 
down  to  £1,035,000  in  1889  1. 

The  expediency  of  allowing  the  parties  liable  to  redeem 
charges  depends  altogether  on  the  nature  of  the  burden. 
As  long  as  the  land  tax  was  really  variable  or  intended  to 
be  so,  the  permission  to  capitalize  the  payments  would 
necessarily  be  futile,  since  a  fresh  charge  could  always  be 
imposed,  but  where  fixity  has  been  introduced  the  redemp- 
tion is  generally  for  the  advantage  of  both  sides,  for  that  of 
the  person  liable  since  otherwise  he  would  not  consent  to 
redeem,  and  for  that  of  the  State  which  is  thereby  enabled 
to  reduce  its  liabilities.  Whether  a  charge  should  be 
rendered  fixed  or  not  depends  on  the  way  in  which  it  has 
been  established,  and  is  mainly  determined  by  considera- 
tions of  public  policy.  The  conversion  of  taxes  into  fixed 
payments  is,  however,  unquestionably  an  error  in  Finance, 
as,  owing  to  the  growth  of  public  expenditure,  provision  has 
to  be  made  for  procuring  larger  sums,  while  the  immo- 
bility of  each  existing  tax  compels  the  financier  to  have 
recourse  to  new,  and  on  the  whole,  less  eligible  sources  of 
revenue.  The  same  consideration  applies  to  commutations 
of  rent,  either  of  land,  of  mines,  or  of  concessions  for  rail- 
ways, canals,  and  other  undertakings.  The  probability  is 

1  See  Dowell,  History  of  Taxation,  ii.  48  sq.,  and  iii.  81-91,  for  the  history 
of  the  tax.  Movable  property  was  exempted  in  1833,  and  offices  and  pensions 
in  1875. 


22O  PUBLIC   FINANCE.  [BOOK  II. 

that  they  will  give  a  larger  return  at  each  renewal,  and 
this  additional  gain  is  lost  by  commutation  for  a  fixed  sum 
unless,  indeed,  full  allowance  is  made  in  the  arrangement 
for  the  value  of  the  increments  that  may  reasonably  be 
expected  in  the  future.  Such  transactions  are*  not  usually 
settled  on  terms  favourable  to  the  public  revenue.  An 
individual  will  not  estimate  a  very  distant  gain  at  its  real 
value  to  the  community,  and  as  a  result  the  fixed  payment 
will  be  but  slightly  raised  by  the  inclusion  of  a  benefit  to 
come  later  on.  Financially,  it  is  best  to  reserve  these 
prospective  receipts  for  the  new  objects  of  outlay  that  are 
certain  to  arise. 

§  6.  Besides  the  services  attached  to  land,  there  is  a  mis- 
cellaneous group  of  receipts  which  may  conveniently  be 
noticed  here.  Historically  they  belong  to  the  class  of 
regalia^  and  are  due  to  the  Sovereign's  prerogative. 
Amongst  them  we  may  mention  charges  for  the  privilege 
of  hunting,  or  of  fishing,  which  to  some  small  extent  con- 
tribute to  the  public  revenue  at  present.  Mediaeval  Finance 
expanded  this  class  of  receipts  to  a  remarkable  extent. 
They  acted,  as  Roscher  has  shown,  as  a  transitional  form 
between  the  earliest  condition  in  which  the  domanial  revenue 
sufficed  for  the  royal  service,  and  the  later  state  economy 
depending  chiefly  on  taxation  1.  Our  modern  customs  and 
excises  appear  in  germ  in  these  feudal  or  imperial  dues. 
Succession  duties  can  also  be  referred  to  the  same  source, 
but  apart  from  what  may  fairly  be  regarded  as  tax  revenue 
in  rudimentary  form,  there  are  the  well-known  feudal  aids  ; 
the  right  of  the  Sovereign  to  fines ;  that  of  taking  owner- 
less goods,  and  the  numberless  other  claims  that  the  in- 
genuity of  lawyers  succeeded  in  establishing. 

Modern  Finance  has  chiefly  to  deal  with  these  preroga- 
tive rights  so  far  as  they  help  to  explain  the  evolution  of  the 
existing  systems  of  taxation,  or  in  the  scattered  remnants 
which  are  found  as  survivals  in  every  country,  inexplicable 

1  Roscher,  §  18.     The  whole  chapter  (Bk.  i.  ch.  4)  is  one  of  the  best  in 
his  work. 


CHAP.  IV.]  THE   STATE   AS  CAPITALIST.  221 

except  on  historical  grounds.  This  discussion  also  serves 
as  a  suitable  introduction  to  another  class  of  public  receipts 
that  has  presented  much  difficulty  in  regard  to  its  correct 
position  in  the  financial  system. 

§  7.  The  problem  of  classifying  the  revenues  known  as 
'  fees '  (Gebilhreii)  need  not  be  again  considered 1.  In 
accordance  with  the  conclusion  before  reached  no  separate 
department  for  fees  is  requisite.  Some  of  the  so-called 
Gebuhren,)  e.  g.  the  postal  revenue,  have  been  noticed  in  the 
preceding  chapter,  others  will  find  their  place  in  the  study 
of  taxation,  while  the  remainder  of  the  heterogeneous  class 
will  be  considered  here  as  a  sequel  to  the  fixed  charges 
imposed  by  the  State.  By  this  method  the  complications 
that  otherwise  occur  are  avoided  and  the  creation  of  a 
distinct  group  of  state  receipts,  co-ordinate  with  that 
derived  from  taxation,  becomes  unnecessary. 

If  further  justification  were  needed  for  this  breaking  up 
of  the  topic  of  Gebilhren  that  German  financial  science  has 
laboured  so  strenuously  to  develope,  it  would  be  found  in  the 
remarkable  divergences  of  opinion  among  its  exponents. 
No  two  of  the  able  and  erudite  workers  at  the  subject  give 
precisely  the  same  interpretation  and  arrangement.  The 
one  fixed  and  definite  result  obtained  can  be  and  is  recog- 
nised in  our  treatment,  viz.  that  the  '  fee  '  is  paid  in  return 
for  service  done,  and  that  it  does  not  bring  in  a  clear  return 
to  the  State  over  and  above  the  cost  of  the  service  for 
which  it  is  paid. 

The  classification  and  division  of  the  different  kinds  of 
fees  is  almost  as  unsettled  as  the  nature  and  position  of  the 
whole  system,  but  when  we  deduct  those  charges  that  really 
belong  to  the  industrial  domain,  as  also  whatever  is  in  fact 
tax  revenue  the  difficulty  is  very  much  lessened.  Special 
reasons  apart,  the  State  might  charge  for  any  service  ren- 
dered to  a  determinate  individual,  and  therefore  it  would 
seem  abstractedly  possible,  that  each  public  function  would 
have  its  corresponding  fees.  State  services  cannot,  as  we 

1  See  Bk.  ii.  ch.  i.  §§4,  5. 


222  PUBLIC    FINANCE.  [BOOK  II. 

know,  be  analyzed,  and  their  effect  on  each  citizen  assigned. 
The  general  interests  of  the  society  are  a  matter  of  im- 
portance to  all ;  were  it  otherwise  the  whole  organization  of 
the  State  might  be  dissolved  and  its  duties  given  up  to  in- 
dividual enterprise.  Fees  come  in  only  as  a  supplement  to 
the  other  receipts  of  the  public  exchequer,  and  have  to  be 
confined  to  certain  cases  of  measurable  services  where  the 
citizen  is  brought  into  direct  contact  with  the  public 
power. 

§  8.  The  administration  of  justice  has  been  the  occasion 
for  the  earliest  of  these  charges.  Without  returning  to  the 
previously  considered  position  of  primitive  law  courts l  we 
need  only  bear  in  mind  that  the  cost  of  law  services  has  been 
more  and  more  placed  on  the  general  revenue.  From  being 
self-supporting,  the  cost  of  justice  has  been  steadily  in- 
creasing. Nevertheless,  a  large  number  of  charges  are  still 
levied  in  connexion  with  legal  proceedings  in  every  modern 
country.  The  United  Kingdom  shows  net  receipts  for  the 
year  1889-90  to  the  amount  of  £615,889  under  the  general 
head  of  '  Fees/  of  which  by  far  the  largest  part  was  obtained 
from  court  charges,  the  English  Judicature  alone  con- 
tributing £352,356.  Local  governments  also  receive  fees 
for  police  and  justice  which  ought  in  strictness  to  be  added, 
but  the  total  amount  was  less  than  £500,000  for  1887-8. 
In  France  the  system  of  court  fees  in  the  older  form  of 
epices  was  abolished  at  the  Revolution,  but  the  charges  for 
documents  and  legal  forms  are  still  a  part  of  the  revenue 
under  the  title  Greffe.  The  Timbre  or  stamp  duty  also 
affects  judicial  acts,  but  the  greater  part  of  its  return  is 
really  taxation.  For  the  year  1888  the  receipts  from  the 
Greffe  were  8,225,000  francs.  The  same  category  of 
receipts  in  Italy  for  the  year  1881  came  to  7.000,000  lire. 
The  several  German  States,  as  well  as  the  Imperial  Go- 
vernment, obtain  more  or  less  revenue  from  the  same 
source.  So  do  many  of  the  American  commonwealths, 

1  Bk.  i.  ch.  3.  §  i. 


CHAP.  IV.]  ADMINISTRATIVE   REVENUE.  223 

but  the  value  of  the  comparative  figures  is  very  little, 
owing  to  the  intermixture  of  fees  with  taxation  l. 

Besides  the  revenue  derived  from  contentious  proceed- 
ings, or  from  fines  on  criminals,  there  are  numerous  juridical 
acts  which  require  for  their  validity  the  payment  of  a  con- 
tribution to  the  State,  or  which  involve  work  on  the  part 
of  the  public  officials,  that  can  be  charged  for  on  the 
ordinary  principle  of  service  done.  Such  are  entries  in 
official  registers,  grants  of  naturalization  and  the  supply  of 
copies  of  legal  transactions.  One  of  the  most  important  in 
practice  is  the  dealing  with  land  titles.  In  all  countries 
with  a  proper  land  system  owners'  titles  are  registered  and 
changes  in  the  rights  over  land  are  recorded.  The  benefit 
of  such  a  system  to  owners  and  intending  purchasers  is 
beyond  question,  while  the  cost  is  very  moderate.  A  low 
scale  of  fees  for  the  operations  of  the  registry  suffices  to 
cover  its  expenses,  and  therefore  is  an  eminently  suitable 
mode  of  providing  for  them.  Such  charges  are  in  principle 
clearly  distinct  from  the  heavy  duties  on  the  transfer  of 
land  that  still  exist  in  France,  and  form  a  part  of  the 
system  of  Enregistrement.  Low  fees  have  the  double  ad- 
vantage of  securing  without  difficulty  a  good  proportion  of 
the  expense  that  administration  entails,  and  of  allowing 
transactions  to  be  carried  on  without  check. 

§  9.  Fees  for  justice  and  juridical  acts  shade  off  almost 
insensibly  into  '  administrative  fees '  (  Veriualtungsgebiihren}, 
so  that  many  of  those  enumerated  in  the  preceding  section 
might  fairly  be  placed  under  the  latter  head,  but  where  the 
payment  is  made  in  connexion  with  questions  of  legal  right 
it  seems  better  to  regard  it  as  a  '  law  fee.'  Among  ad- 
ministrative fees  those  for  ordinary  certificates,  e.  g.  of 
births,  deaths,  and  marriages,  may  be  included,  the  issue  of 
passports,  attestation  of  degrees  and  diplomas,  and  the 

1  Die  absolute  und  relative  Hohe  des  Gebiihrenertrages  in  verschiedenen 
Staaten  mit  einander  zu  vergleichen,  ist  darum  bis  jetzt  nur  hochst  unvoll- 
kommen  moglich,  weil  die  Gebiihren  fast  iiberall,  jedoch  mit  sehr  verschiedenem 
Grade,  mit  Verkehrssteuern  verquickt  sind,'  Roscher,  §  23,  n.  16 ;  cp.  Wagner, 
ii.  69. 


224  PUBLIC    FINANCE.  [BOOK  II. 

many  other  payments  for  special  official  relations.  Most 
important,  however,  are  the  charges  which  are  more  or  less 
connected  with  economic  transactions,  such  as  fees  for  testing 
the  quality  of  articles  that  now  exist  chiefly  as  survivals  of 
the  older  system  of  regulation,  as  e.g.  the  English  hall- 
marks on  gold  and  silver,  or  have  been  introduced  on  social 
grounds,  as  in  the  case  of  testing  for  adulteration. 

In  this  somewhat  miscellaneous  collection,  whose  in- 
definiteness  results  from  the  wide  extension  of  state  func- 
tions, may  be  placed  the  revenue  from  seigniorage.  The 
function  of  coining  money  is  undertaken  by  every  civilized 
government,  and  in  most  cases  a  small  amount  of  the  metal 
sent  for  coinage  is  retained  in  order  to  meet  the  expenses 
of  the  process.  Where  the  deduction  is  limited  to  the 
amount  necessary  to  cover  the  cost  it  is  substantially  a  fee 
for  guaranteeing  the  fineness  and  weight  of  the  currency. 
The  English  mint  does  not  do  even  this  in  respect  to  the 
gold  coinage,  which  is  a  cause  of  expense  to  the  State.  It 
is  more  than  recompensed  on  the  token  coinage  of  silver 
and  copper  which  gives  a  varying  surplus  amounting  for 
the  year  1889-90  to  the  unusually  large  sum  of  .£774,000. 
A  receipt  of  so  considerable  an  amount,  if  normal,  would 
not  be  treated  under  the  present  head.  If  it  could  be 
shown  that  the  seigniorage  charge  pressed  on  any  class  or 
classes  it  would  be  a  special  tax  levied  on  them  ;  if  it  was 
the  result  of  state  monopoly  it  would  be  a  gain  of  the 
State  from  the  industrial  undertaking  of  coinage.  As  any 
large  gain  is  very  rare — the  receipts  of  the  English  mint 
for  1889-90  were  described  by  Mr.  Goschen  as  'a  windfall 
which  cannot  be  expected  to  recur1'— and  as  some  mints 
do  not  cover  their  working  expenses  it  is  best  to  regard 
seigniorage  as  being  one  of  the  class  of  *  fees.' 

Charges  for  testing  weights  and  measures  make  another 
item  in  the  list,  so  do  light-house  dues  and  dock  charges.  In 
almost  every  case  of  administrative  action  there  will  be 

1  Budget  Speech,  April  lyth,  1890.  The  receipt  for  1890-1  was  .£200,000 
over  the  estimate. 


CHAP.  IV.]  ADMINISTRATIVE   REVENUE.  225 

some  receipts  owing  totHlTtrefinite  services  that  are  ren- 
dered to  individuals  or  the  commodities  supplied  to  them. 
The  sale  of  official  publications  may  be  given  as  an 
example. 

A  comparatively  important  head  of  revenue  from  '  fees ' 
is  found  in  the  school  payments  that  excite  so  much  hos- 
tility on  the  part  of  reformers.  The  promotion  of  educa- 
tion has  become  a  public  duty,  involving  extensive  outlay, 
which  must  be  supplied  either  from  taxation  or  from  the 
fees  paid  by  those  who  avail  themselves  of  instruction. 
There  is  no  valid  reason  why  a  part  of  the  expenses  of  the 
system  should  not  be  borne  by  the  parents,  unless  in  the 
case  of  actual  destitution.  The  policy  pursued  is  very 
varying.  The  United  States,  and  France  since  1881,  have 
no  fees  for  primary  schools.  England  and  Germany  retain 
them  as  yet,  though  there  is  every  probability  of  their 
speedy  disappearance  in  the  former  country.  The  receipts 
from  school  fees  in  the  United  Kingdom  for  1889  came  to 
almost  ^"2,230,000.  The  fees  obtained  in  Prussia  in  1886 
to  nearly  11,000,000  marks  l. 

The  higher  educational  institutions  also  produce  fees  in 
small  amounts,  as  e.  g.  in  England  the  University  of 
London  almost  covers  its  annual  working  expenditure  by 
the  fees  of  candidates  for  its  degrees  and  certificates. 

§  10.  Looking  back  on  the  list  of  receipts  that  may  fairly 
be  classed  as  fees,  we  see  the  absence  of  any  harmonious  or 

1  More  precise  figures  are  : —  £ 

England.        Fees  in  School  Board  schools  635,255 

Fees  in  other  schools  receiving  grants  1,207,695 

Scotland.        Fees  in  Public  Schools  249,155 

In  other  Schools  46,164 

Ireland.          School  Fees  in  National  Schools  110,592 

Total  £2,245,861 


In  Germany  the  School  Fees  were  in  1871      10,498,794  marks. 

1878     12,975,527      „ 

„  „  1886     10,926,085 

Cohn,   §   190,  n.  *.      The  Education  Act  of  1891  can  hardly  be  said  to  have 
abolished  fees,  though  it  has  made  their  ultimate  removal  certain. 

Q 


226  PUBLIC    FINANCE. 

logical  arrangement.  There  is  no  branch  of  the  public 
power  to  which  they  can  be  attributed  ;  they  are  spread 
over  the  local  and  general  budgets,  and  sometimes  never 
come  into  account,  being  the  perquisites  of  the  officials  who 
receive  them,  as  is  not  uncommon  in  the  United  States. 
Much  of  the  law  that  regulates  them  is  only  of  interest  in 
administration  ;  they  are  often  inextricably  mixed  up  with 
the  public  industrial  receipts  and  with  taxes,  especially 
'  taxes  ori  commerce  '  (  Verkehrssteuern) 1,  and  finally  the 
aid  they  give  to  the  financier  is  not  considerable.  They 
may  indeed  be  regarded  as  incidental  products  of  state 
action.  Just  as  in  manufacturing  processes  certain  by- 
products are  formed  which  are  sold  for  what  they  can  bring, 
or  as  the  labourer  disposes  of  his  spare  hours  for  any  wages 
that  will  overcome  his  desire  for  leisure,  so  the  mechanism 
of  the  State,  while  aiming  at  the  efficient  discharge  of  the 
tasks  set  to  it,  nevertheless  does  not  refuse  to  collect  revenue 
that  can  be  acquired  without  neglect  of  the  primary  object 
in  view,  and  such  revenue  is  that  from  fees. 

There  is  thus  complete  justification  for  regarding  them 
as  an  appendage  to  the  quasi-private  economic  receipts  as 
we  have  done  in  the  present  chapter. 

1  Cp.  '  Bei  dem  engen  Zusammenhang  von  Rechts-  und  Verwaltungsgebiihren 
mit  Verkehrssteuern  in  der  Praxis  und  bei  der  fur  beide  vielfach  gemeinsamen 
Erhebungsform  im  Stempel  ist  die  beziigliche  Einnahme  daraus  ebenso  wie 
die  Gesetzgebung  dariiber  nicht  wohl  zu  trennen.  Die  Gesetze  betreffen  meist 
beide  Abgabearten  in  bunter  Vermengung,'  Wagner,  ii.  69. 


CHAPTER  V. 

\ 

STATE  PROPERTY. — GENERAL  CONSIDERATIONS  ON 
QUASI-PRIVATE  REVENUE. 

§  1.  WE  have  now  examined  the  different  classes  of  public 
receipts  that  can  be  fairly  classed  as  '  quasi-private '  or 
'  economic ' ;  what  the  practical  financier  would  describe 
as  '  non-tax  revenue.'  The  component  elements  are  some- 
what heterogeneous,  a  necessary  result  of  the  variety  and 
complexity  of  public  administration.  Some  of  the  categories 
shade  off  indefinitely  into  the  other  great  class  of  contribu- 
tions obtained  through  taxation,  and  thus  deprive  the 
technical  groupings  made  for  practical  purposes  of  the 
logical  consistency  needed  in  scientific  inquiry.  In  another 
respect  the  nature  of  things  presents  difficulties  in  the  way 
of  precise  classification.  The  '  economic '  revenue  of  the 
State  is  the  product  of  property  held,  or  payment  for  ser- 
vices done,  by  it.  Great  masses  of  public  property  are 
however,  not  productive  of  revenue  in  the  ordinary  sense. 
From  the  Houses  of  Parliament  down  to  the  smallest 
court-house,  from  Epping  Forest  to  the  village  green, 
there  are  buildings  and  lands  that  bring  in  no  return  to  be 
entered  in  any  budget,  local  or  general.  They  are,  never- 
theless, a  constituent  part  of  the  public  domain,  the  loss  of 
which  would  be  seriously  felt  even  financially.  They  con- 
tribute not  wealth  in  the  strict  sense  but  utility,  and  the 
problem  of  determining  their  financial  advantage  is  there- 

Q  2 


228  PUBLIC   FINANCE.  [BOOK  II. 

fore  a  difficult  one.  It  seems  that  the  best  mode  of  framing 
an  approximately  correct  estimate  is  to  take  the  sacrifice 
that  their  loss  would  impose.  The  destruction  of  the  public 
buildings  of  this  class  in  the  United  Kingdom  would  place 
a  considerable  charge  on  both  national  and  local  resources, 
and  this  sum  gauges  the  value  of  the  existing  buildings. 
The  same  test  applies  to  the  land  devoted  to  general  use, 
such  as  parks,  commons,  and  roads  when  free  from  tolls 1. 
The  last-mentioned  case  shows  how  revenue-yielding  pro- 
perty can  pass  into  the  class  under  discussion,  and  the 
French  canals  previously  noticed  afford  another  instance. 
Strictly  speaking,  the  policy  of  charging  fees  only  equi- 
valent to  the  cost  of  maintenance  or  less  than  it  is  an 
intermediate  stage  between  using  state  possessions  as  a 
source  of  economic  revenue,  and  abandoning  them  to 
gratuitous  use. 

The  extension  of  this  '  unproductive '  public  domain  is 
one  of  the  remarkable  features  of  the  present  century.  The 
movement,  usually  described  under  the  title  of  '  State 
Socialism/  has  made  the  public  powers  owners  of  museums, 
picture-galleries,  libraries,  baths,  gardens,  and  the  other 
appliances  of  a  civilized  society.  No  data  are  at  present 
available  for  forming  an  adequate  conception  of  the  extent 
of  the  movement,  but  of  its  reality  and  importance  there 
can  be  no  question.  It  is  not  limited  to  any  particular 
country,  and  it  is  as  prominent  in  local  as  in  central  govern- 
ment. Though  commonly  placed  under  the  head  of  '  State- 
sacialismj  it  is  really  communistic  rather  than  socialistic, 
since  it  implies  the  gratuitous  supply  of  certain  advantages 

1  Other  but  le?s  satisfactory  measures  have  been  sometimes  suggested. 
Instead  of  the  cost  of  restoration  the  original  cost  of  production  or  acquisition 
would,  it  is  said,  show  the  amount  of  public  advantage  obtained  from  the 
outlay.  This  method  is  certainly  easier  and  more  definite,  but  it  overlooks 
the  fact  that  mere  cost,  as  such,  does  not  determine  value,  and  that  all  fixed 
forms  of  wealth  change  their  values,  generally  in  a  downward  direction,  in  the 
course  of  time.  Land  is  the  only  part  of  the  national  possessions  that  is 
likely  to  increase  in  value.  The  measure  of  present  exchange  value  is  also 
inapplicable,  as  much  of  the  property  forming  the  public  domain  is  not  of  a 
kind  that  is  demanded  by  private  purchasers. 


CHAP.   V.]  STATE    PROPERTY.  22Q 

that  may  be  wholly  unearned  by  the  receivers.  The  classes 
who  benefit  directly  are  not  those  who  contribute,  even  in 
labour,  to  the  work  of  society.  The  public  domain  applied 
to  either  state  or  general  use  also  influences  the  financial 
position  by  the  outlay  that  is  needed  to  keep  it  in  efficient 
working.  The  existence  of  numerous  public  buildings,  of 
large  areas  of  land  devoted  to  the  service  of  the  community, 
of  works  directly  supplying  state  needs  might  give  a  very 
considerable  sum  of  assets  to  be  entered  in  the  national 
ledger  if  an  inventory  of  state  property  were  taken  *.  It 
must,  however,  be  remembered  that  the  State  is  in  mercan- 
tile phraseology  '  a  going  concern.'  Its  property  cannot  be 
realized  without  suspending  the  processes  of  political  life, 
and  so  long  as  these  continue  further  expenditure  is  un- 
avoidable. This  part  of  public  property  resembles  the 
mansion,  demesne,  coinage,  plate  and  furniture  of  a  rich 
man,  which  are  only  productive  of  wealth  on  the  break- 
ing-up  of  his  establishment,  and  otherwise  involve  him  in 
additional  outlay.  Each  is  in  the  language  of  modern 
economists  the  '  consumers'  capital '  of  the  proprietor, 
affording  utility  but  not  revenue  in  the  narrower  sense  of 
the  word. 

These  various  points  of  connexion  are  quite  sufficient 
ground  for  noticing  the  unproductive  possessions  of  the 
State,  and  their  suitable  position  is  plainly  in  immediate 
sequence  to  that  other  section  of  public  property  which  does 
contribute  to  the  resources  of  the  Budget.  Between  land 
earning  profit  and  land  that  merely  affords  enjoyment 
there  are  so  many  intermediate  gradations,  that  we  pass 
almost  insensibly  from  one  to  the  other ;  and  the  same 
statement  is  applicable  to  some  other  forms  of  fixed 
capital. 

There  is  an  evident  convenience  in  the  use  of  separate 
terms  for  these  two  classes  of  public  property.  The 
language  of  French  administration  describes  the  revenue- 
giving  part  as  Domaine  prive  de  tetat,  while  the  remainder 

1  As  pursued  in  Italy  under  the  system  of  M.  Cerboni. 


230  PUBLIC    FINANCE.  [BOOK  II. 

is  the  *  Domaine  public  J  though  the  latter  term  is  some- 
times used  in  a  wider  sense  to  include  all  the  possessions  of 
the  State.  The  phrase  Domaine  prive  has  often  a  legal 
rather  than  an  economical  or  financial  meaning,  and  denotes 
the  property  held  by  the  State  as  a  juristic  person.  Stein 
has  proposed  the  terms  '  Staatsbesitz*  and  '  Domdnen  '  for 
the  *  unproductive '  and  '  productive '  parts  of  the  public 
property,  and  perhaps  the  best  English  equivalents  would 
be  'property'  and  'domain,' though  the  former  is  rather 
too  vague  unless  qualified  by  some  limiting  term  1. 

§  2.  All  the  sources  of  revenue  described  in  the  present 
book  possess  one  common  feature  that  differentiates  them 
from  the  tax  receipts.  Their  amount  has  no  essential  con- 
nexion with  the  public  wants.  No  matter  what  may  be1 
the  demands  on  the  public  treasury  the  various  parts  of  the! 
national  domain  will  continue  to  give  the  returns  that  the 
economic  conditions  establish.  State  lands  will  afford  rentj 
state  investments  interest,  and  state  industries  profit  under 
the  normal  form  of  those  divisions  of  income.  They  will 
not  increase  in  times  of  pressure,  nor  will  they  diminish 
when  funds  are  abundant,  and  they  therefore  deserve  the 
epithet  '  mechanical '  as  opposed  to  '  organic '  which  has 
been  given  to  them 2.  This  feature  of  itself  makes  recourse 
to  taxation  a  necessity  in  times  of  increasing  expenditure. 
Even  on  the  supposition  that  England  had  sufficient  returns 
from  its  economic  revenues  to  meet  the  expenditure  of 
1790,  the  French  wars  would  have  disturbed  the  balance, 
and  it  would  never  since  have  been  restored.  It  might 
appear  that  the  proposition  just  stated  is  not  strictly 
exact.  Fresh  state  wants  might  lead  to  more  judicious 
management  of  the  domain.  Rents  might  be  brought 
nearer  to  the  economic  limit.  State  industries  might  be 
worked  with  a  closer  eye  to  profit,  and  fees,  notably,  might 
be  made  higher.  This  qualification  is  only  apparent.  The 

1  Leroy-Bcaulieu,  i.  28;    Say,  Dictionnaire  d' Economic  Politique,  i.   719; 
id.,  Dictionnaire  des  Finances,  i.  1482-85  ;  Stein,  ii.  144  sq. 
-  Umpfenbach,  78. 


\ 

CHAP.  V.]    CONSIDERATIONS  ON  QUASI- PRIVATE  REVENUE.    23! 

previous  low  receipts  were  either  the  result  of  bad  manage- 
ment or  of  a  particular  line  of  policy,  and  if  the  former, 
could  have  been  rectified  apart  from  the  new  needs ;  if  the 
latter,  would  involve  the  loss  of  the  object  previously  aimed 
at.  Increased  rents  may  retard  agricultural  advance ; 
higher  railway  charges  injuriously  affect  commerce,  and 
increased  fees  tend  to  limit  the  transactions  on  which  they 
are  charged.  Assuming  then  that  pre-existing  receipts 
have  been  arranged  on  correct  principles,  no  increase  can 
be  obtained  without  a  corresponding  loss  to  the  community, 
and  in  many  instances  it  will  be  really  taxation,  as  may 
easily  happen  with  regard  to  any  economic  source  of 
income.  It  is  further  probable  that  new  demands  will  act 
injuriously  on  the  economic  revenues,  e.g.  a  war  retards 
social  progress. 

The  antithesis  between  '  mechanical '  and  '  organic ' 
revenue  is  thus  shown  to  be  based  on  the  natural  conditions 
of  the  two  classes,  and  to  indicate  the  place  of  each  in  a 
developed  financial  system. 

§  3.  The  division  of  the  mechanical  sources  between  central 
and  local  authorities  is  in  general  determined  by  the 
history  and  situation  of  each  particular  country.  Land 
may,  it  would  seem,  be  held  either  by  the  State  as  repre- 
senting the  sovereign  of  mediaeval  times,  or  by  the  parish 
or  commune  which  is  the  descendant  of  the  old  village 
community,  but  peculiarities  in  legal  development  have 
influenced  the  actual  position.  The  English  parish  is  very 
different  from  the  French  commune  with  its  juristic  per- 
sonality, and  separate  property.  The  commune  and  the 
State  are  in  most  European  countries  the  only  public  powers 
that  have  had  enough  continuity  of  existence  to  acquire 
the  ownership  of  land.  The  crown  and  church  possessions 
have  passed  to  the  latter,  the  'waste'  of  the  district  to  the 
former. 

Intermediate  bodies  under  unified  governments,  e.  g. 
the  English  '  County '  and  the  French  '  Department '  have 
little  economic  receipts,  and  what  they  possess  is  of  recent 


232  PUBLIC    FINANCE.  [BOOK  II. 

orig'in.  Federation  naturally  supplies  the  principal  sub- 
divisions with  larger  possessions,  or  rather  it  leaves  them 
the  wealth  which  they  held  before  union,  though  in  certain 
cases  the  tendency  is  towards  placing  land,  and  especially 
forests,  under  the  central  government 1. 
|  With  regard  to  industrial  undertakings  the  general  rule, 
confirmed  by  practice,  is  in  favour  of  placing  them  in 
charge  of  the  State. '  Local  bodies  cannot  be  expected  to 
deal  wisely  with  the  complicated  and  involved  questions 
that  must  arise.  The  principle  of  'particular  interest'  is 
the  reason  for  a  class  of  exceptions.  Just  as  those  public 
functions  that  principally  concern  a  town  or  district  should, 
generally  speaking,  be  entrusted  to  its  authorities,  so  should 
the  industries  connected  with  those  functions  or  services. 
It  is  on  this  ground  that  municipal  gas  and  water  works, 
main  drainage  systems,  and  tramways  are  to  be  justified. 
Such  undertakings  are  most  prominent  in  urban  districts, 
but,  if  needed,  rural  bodies  may  fitly  carry  them  out.  Local 
railway  lines  (e.  g.  the  Chemins  de  Per  tfinteret  local  of 
French  Finance)  may  be,  and  sometimes  are,  owned  by  the 
appropriate  local  body.  The  railways  possessed  by  the 
various  German  States  would  probably  be  more  successful 
if  they  were  in  the  hands  of  the  imperial  administration, 
and  such  was  the  original  design  of  the  promoters  of  state 
purchase,  only  defeated  by  the  jealousy  of  the  smaller  States. 
Postal  and  telegraphic  administration  and  industries 
monopolized  for  the  purpose  of  special  taxation  are  best 
suited  for  administration  by  the  general  government.  As 
regards  the  various  receipts  capable  of  capitalization  no 
general  rule  obtains.  Where  they  are  received  by  local 
bodies  supervision  by  state  officials  is  desirable  in  order  to 
prevent  mal-administration  or  redemption  for  insufficient 
value,  but  there  seems  to  be  no  reason  for  depriving  a  town 
or  district  of  any  resources  of  the  kind  that  it  may  possess. 

1  Cp.  the  recent  Swiss  legislation  on  forests  already  mentioned  (Bk.  ii.  ch.  2. 
§  10),  and  the  surrender  of  public  lands  by  American  States  to  the  Federal 
Government. 


CHAP.  V.]   CONSIDERATIONS  ON  QUASI-PRIVATE  REVENUE.    233 

Its  taxation  is  so  far  reduced,  and  the  nation  as  a  whole 
has  no  claim  to  the  funds. 

/Fees  have  to  be  distributed  according  to  their  source. 
Local  administration  is  fairly  entitled  to  what  may  be 
called  its  '  incidental  earnings.'  On  the  other  hand  all 
administrative  revenue  that  is  gained  by  agents  of  the 
central  government  is  justly  due  to  it/  By  this  simple 
rule  much  confusion  is  avoided,  and  there  is  the  best 
chance  of  effective  control. 

/  A  like  consideration  ought  to  guide  the  division  of  un- 
productive property.  Whatever  land  or  buildings  subserve 
the  wants  of  local  administration  should  belong  to  the 
authority  so  administering  :  the  general  government  should 
retain  the  remainder/  Thus  buildings  for  the  local  courts, 
parks,  or  baths  for  a  town  are  best  put  under  local  control. 
National  museums  or  libraries,  or  the  principal  courts  of 
justice,  belong  rightly  to  the  State. 

§  4.  The  necessity  or  advantage  of  general  rules  on  the 
subject  of  division  is,  however,  much  reduced  by  two  cir- 
cumstances, viz.  first,  the  variety  of  conditions  in  different 
countries,  and  the  numerous  modifications  in  the  structure 
of  local  government.  Much  more  depends  on  the  character 
of  the  particular  people,  or  even  the  particular  body,  than 
is  usually  the  case  in  Finance.  Thus  the  devolution  with 
benefit  of  powers  to  the  Corporation  or  to  the  County 
Council  of  London  is  no  argument  for  a  similar  course 
with  the  municipality  of  Paris.  Nor  can  inferences  be 
safely  drawn  from  both  those  bodies  to  the  proper  position 
of  the  Corporation  of  New  York.  At  present  the  duty  of 
the  inquirer  is  rather  to  note  the  actual  phenomena,  avoid- 
ing hasty  generalization.  The  other  qualifying  circumstance 
is  the  interaction  of  the  central  and  local  bodies  in  respect 
to  Finance.  Not  to  touch  as  yet  on  taxation,  we  can,  even 
at  present,  see  that  land  belonging  to  the  communes  may 
for  financial  reasons  be  managed  by  the  State,  and  the 
receipts  paid  over  to  the  owners.  Again,  local  bodies  may 
for  convenience  or  economy  take  charge  of  public  property 


234  PUBLIC    FINANCE.  [BOOK  II. 

which  is  essentially  that  of  the  State.  So  also  general  fees 
may  be  received  by  local  officials  or  vice  versa.  The  con- 
sequence is  that  the  two  agencies,  or  rather  the  two  sides, 
of  the  public  power  are  so  interlocked  that  systematic 
distribution  of  revenue  cannot  be  made  without  a  compre- 
hensive survey  of  the  whole  position,  and  full  allowance 
for  the  many  influencing  conditions. 

§  5.  A  final  question  now  presents  itself,  viz.  what  is  the 
proportion  of  revenue  contributed  by  the  '  mechanical ' 
sources  ?  Or  in  other  words,  how  much  is  left  to  be 
supplied  by  taxation  ?  The  answer,  it  need  not  be  said, 
will  vary  according  to  the  time  and  the  country  to  which 
it  applies.  In  some  German  States,  at  the  end  of  the 
Middle  Ages,  taxation  did  not  exist  save  as  an  exceptional 
resource.  The  present  English  or  French  revenue  is  almost 
wholly  made  up  from  this  '  extraordinary '  aid,  as  it  was 
anciently  called.  And  many  intermediate  positions  are 
to  be  found. 

Before  entering  on  these  particulars  we  must  recall  a 
distinction  noticed  already  for  another  purpose,  viz.  that 
between  gross  and  net  revenue.  Modern  Finance  has 
accepted  as  correct  the  policy  of  bringing  all  sums  received 
and  expended  into  account,  so  that  the  Budget  shall  con- 
ceal no  defect  in  the  operations  carried  on.  For  scientific 
analysis  it  is  just  as  necessary  to  eliminate  certain  elements 
from  each  side  of  the  accounts.  To  take  the  nearest 
example.  In  the  English  budget  statement  of  1891, 
Posts  and  Telegraphs  figure  on  the  revenue  side  for 
^"12,180,000,  and  add  roughly  about  13  per  cent,  to 
the  receipts.  The  expenditure  was,  however,  taken  as 
^7595°5oo°j  and  this,  deducted  from  the  former  sum,  leaves 
the  more  modest  item  of  £4,230,000,  or  5  per  cent.  If  all 
the  component  parts  of  revenue  were  equally  affected  by 
this  diminution  there  would  be  no  difficulty  in  comparing 
amounts  ;  but  the  nature  of  the  quasi-private  state  revenue 
makes  the  gross  largely  exceed  the  net  receipts,  while 
in  respect  to  taxation  the  existence  of  any  remarkable 


CHAP.  V.]   CONSIDERATIONS  ON  QUASI-PRIVATE  REVENUE.    235 

difference  between  the  two  is  of  itself  a  strong  objection  to 
the  particular  form  so  affected  as  showing  undue  cost  in  col- 
lection. Nor  are  these  differences  confined  to  the  tax  as 
opposed  to  the  non-tax  receipts ;  within  the  latter  class  the 
relation  of  net  and  gross  revenue  is  not  in  every,  perhaps 
hardly  in  any,  case  exactly  the  same.  The  Indian  land 
revenue  gives  a  very  high  proportion  of  net  return  ;  in 
1888-9,  about  £19, 500,000  out  of  £23,000,000.  The  Prussian 
mines  on  the  contrary  give  very  little  net  receipts,  and 
some  purely  industrial  enterprises  have  often  a  balance  on 
the  wrong  side. 

What  is  most  important  at  present  is  to  recognise  that 
in  estimating  the  financial  merits  of  the  various  sources  net 
revenue  is  the  only  sound  basis  of  calculation.  No  matter 
what  are  the  gross  incomings,  if  there  are  equal  outgoings 
the  exchequer  does  not  benefit.  Taking  this  view  we  are 
led  to  reduce  very  much  the  importance  of  the  economic 
receipts.  Except  in  the  case  of  rent  the  net  returns  are 
small.  Even  the  Prussian  state  railways,  the  most  profit- 
able of  public  undertakings,  do  not  produce  much  revenue 
when  compared  with  the  total  net  receipts  of  the  budget. 
Besides  the  intrusion  of  the  tax  element  tends  to  deprive 
some  of  the  most  important  public  industries  of  their 
purely  economic  character. 

§  6.  The  intermixture  of  economic  and  tax  revenues  as 
well  as  the  complications  of  net  and  gross  receipts,  and  the 
involved  relations  of  capital  and  revenue  accounts,  prevent 
a  precise  and  definite  answer  regarding  the  proportion  of 
public  expenditure  defrayed  out  of  taxation.  It  is,  how- 
ever, possible  to  give  approximate  results  that  are  not 
without  value.  In  the  English  financial  year  1890-91,  the 
taxation  receipts  were  £73,663,000.  The  cost  of  collec- 
tion was  £2,645,000,  leaving  a  net  return  of  £71,000,000. 
Non-tax  receipts  came  to  £15.911,000;  expenditure  to 
£9,450,000  ;  and  the  net  receipts  to  £6.460,000. 

Passing  over  the  various  readjustments  that  the  questions 
of  fees,  and  the  distribution  of  interest  on  capital  charges. 


236  PUBLIC    FINANCE.  [BOOK  II. 

might  in  strictness  necessitate,  92^  per  cent,  is  obtained  from 
taxation  against  y|  per  cent,  from  other  sources.  Local 
Finance  in  England  and  Wales,  for  the  year  1888-9  (the  last 
available),  gained  by  taxation  almost  £28,000,000  directly 
and  £4,750,000  from  contributions  of  the  central  govern- 
ment. Industrial  undertakings  yielded  over  £9,000,000  ; 
while  their  cost  was  somewhat  less  than  £5,000,000. 
This  balance  of  over  £4,000,000  has  to  be  further  reduced 
by  the  interest  on  debt  incurred  on  the  industries  in  ques- 
tion, or  about  three  millions,  the  net  gain  being  brought 
down  to  £1,000,000.  Fees,  fines,  school  money,  rents,  and 
dividends,  came  to  about  £4,750.000,  from  which  the 
uncertain  cost  of  collection  has  to  be  taken.  The  broad 
inference  from  these  figures  is  that  about  70  per  cent,  of 
the  gross  local  receipts  come  from  taxation,  the  balance  of 
30  per  cent,  being  otherwise  obtained,  but  that  in  the  net 
receipts  taxation  stands  to  other  sources  in  the  ratio 
of  6  to  i  l. 

Germany  shows  a  somewhat  different  position.  Nearly 
all  the  German  States  have  a  good  percentage  of  their  gross 
receipts  from  economic  revenue,  but  when  the  cost  of  gain- 
ing that  revenue  is  taken  into  account  there  is  very  little 
surplus  left.  Thus  the  estimated  net  revenue  for  the  year 
1889-90  from  the  Prussian  lands,  forests,  and  industries 
(other  than  railways),  was  less  than  56,000,000  marks 
(£2,800,000),  the  railway  earnings  (part  of  which  is  perhaps 
taxation)  contributed  113  million  marks  (about  £5,680,000), 
or  a  total  of  about  169,000,000  marks  (or  £8,450,000).  The 
gross  receipts  would  convey  a  quite  different  impression. 
They  for  the  same  year  were  estimated  at  965  million 
marks,  the  corresponding  outlay,  including  interest  on  rail- 
way debt,  being  796  million  marks.  The  gross  receipts 
from  all  sources  were  taken  at  1,513  million  marks,  the  net 

1  The  returns  of  local  Finance  for  Scotland  and  Ireland  fail  to  distinguish 
between  tax  receipts  and  payments  for  gas  and  water.  Nor  are  the  English 
accounts  as  yet  quite  clearly  separated.  For  earlier  periods  they  are  almost 
useless  for  the  present  purpose. 


CHAP.  V.]    CONSIDERATIONS  ON  QUASI-PRIVATE  REVENUE.    237 

receipts  at  839  million  marks.  The  conclusion  consequently 
is  that  while  the  domain  and  industrial  undertakings  were 
over  63  per  cent,  of  the  gross,  they  were  only  slightly  over 
20  per  cent,  of  the  net  receipts 1. 

The  inclusion  of  fees  and  administrative  revenue  would 
increase  the  proportion  of  economic  receipts,  but  the  tax 
element  is  so  prominent  in  them  (especially  in  the  law  fees) 
that  the  correctness  of  this  course  is  doubtful  2. 

The  other  German  States  resemble  Prussia,  though  in  their 
case  the  proportion  of  net  receipts  by  taxation  is  probably 
larger,  as  their  net  income  from  railways  and  mines  is  lower. 
Austria  and  Hungary,  too,  gain  much  less  than  Prussia 
from  the  economic  sources  of  revenue.  The  estimated  net 
product  of  the  Austrian  state  domains,  forests  and  mines, 
is  only  1.830.000  florins  (;£  183,000).  The  railways,  as 
stated  before,  do  not  meet  their  debt  charge. 

India  is  the  only  other  country  whose  proportion  of 
economic  revenue  is  deserving  of  attention.  One  of  the 
noteworthy  features  of  Indian  finance  is  the  contrast  be- 
tween its  most  productive  sources,  and  those  of  European 
countries,  especially  Great  Britain.  Its  financial  main- 
stay is  in  the  rent  charges  on  land  which,  together  with  the 
parts  that  are  truly  either  rent  or  taxation,  supply  close 
on  £20,000,000  annually.  Other  sources  of  the  same  class 
are  unproductive.  Postal  service,  telegraphs,  and  railways 
lead  to  expenditure  rather  than  profit.  Forests  produce  a 
small  surplus.  The  tax  revenue  is  just  as  sharply  con- 
trasted with  that  of  England.  Salt  and  opium  are  the 
chief  contributories,  and  fiscal  monopoly  is  a  prominent 

1  The  contributions  (Matricularbeitrdge)  of  the  States  to  the  Empire  and 
the  assignments  from  the  imperial  revenue  to  the  States  further  confuse  the 
statistics.     In  1889-90  the  Prussian  contribution  was  114,000,000  marks;  the 
assignment  from  the  imperial  revenue  1 70,000,000  marks,  showing  a  net  gain 
to   the   Prussian    revenue   of  56,000,000   marks,  ^2, 800,000).      The   budget 
should  be  reduced  on  each  side  by  the  sum  of  114,000,000  marks,  which  is 
really  a  matter  of  account. 

2  The  German  law  fees  (Rechtsgebuhrten)  are  so  high  as  to  really  amount  to 
a  tax  on  litigation.     For  estimates  of  the  proportion  of  taxation  and  industrial 
receipts  cp.  Von  Scheel  in  Schb'nberg,  68-69. 


238  PUBLIC    FINANCE. 

agent  in  the  collection.  The  ordinary  excise,  customs  and 
stamps  are  comparatively  unimportant,  so  is  direct  taxation 
which  is  of  such  importance  in  England.  On  the  whole  we 
may  say  that  even  in  India  less  than  half  the  net  receipts 
are  derived  from  quasi-private  sources  of  revenue. 

§  7.  The  preceding  facts  sufficiently  support  the  general 
proposition  that  the  economic  revenue  of  the  State  is 
financially  inferior  to  that  gathered  by  the  tax-collector, 
and  it  also  seems  to  hold  good  that  the  greater  the  economic 
development  of  a  country,  the  less  important  is  the  former. 
Whether  the  statement  will  be  applicable  to  the  future  is 
perhaps  doubtful.  Modern  tendencies  are  in  the  direction 
of  creating  an  industrial  domain  that  may  rival  in  value  the 
agricultural  domain  of  earlier  times,  but  the  net  revenue  to 
be  obtained  from  it  will  probably  be  less  than  would  at  first 
appear  likely.  The  cost  of  constructing  the  modern  state 
domain  and  the  pressure  on  the  administration  to  reduce 
the  cost  of  service  to  the  lowest  point  that  expenses  of 
working  will  allow,  are  both  hindrances  to  the  use  of  state 
industries  as  an  effective  relief  from  the  charge  of  taxation. 
There  is  no  probability  that  in  the  near  future  the  propor- 
tion of  the  public  charges  to  be  met  by  direct  levies  from 
the  citizens  of  the  State  will  diminish,  more  especially 
when  the  rapid  growth  of  public  expenditure  is  taken  into 
account. 

Taxation  will,  therefore,  next  claim  our  attention  and  as 
the  main  support  of  the  State's  economy  will  need  fuller 
and  more  critical  investigation  than  has  been  necessary  with 
other  forms  of  revenue. 


BOOK  III. 

PUBLIC    REVENUE. 
THE  PRINCIPLES  OF  TAXATION. 


CHAPTER   I. 

DEFINITION  AND  CLASSIFICATION  OF  TAXATION. 

§  1.  THE  subject  of  the  present  book  is  undoubtedly  the 
central  part  of  modern  Finance.  Its  importance  has  led 
English  and  American  writers  to  treat  it  as  almost  the  sole 
topic  for  discussion.  Though  this  is  not  true  either  of 
England  or  the  United  States,  and  is  still  more  erroneous 
when  other  countries  are  taken  into  account,  yet  the 
existence  of  such  a  view  proves  the  preponderating  in- 
fluence of  taxation  in  the  modern  financial  organization. 
Another  reason  for  the  great  prominence  of  this  source  of 
state  revenue  is  perhaps  its  close  connexion  with  Eco- 
nomics. State  expenditure  may  be  looked  on  as  a  question 
of  public  policy  to  be  decided  by  the  practical  judgment  of 
'  that  crafty  and  insidious  animal  vulgarly  called  a  states- 
man or  politician';  the  quasi-private  receipts  may  be 
treated  as  almost  a  part  of  private  economy,  but  taxation 
raises  a  series  of  fundamental  questions  which  involve  re- 
fined ethical  and  economic  considerations.  The  effect  of 
any  given  tax  system  is  a  strictly  economic  question  re- 
quiring for  its  solution  frequent  reference  to  the  conditions 
both  of  production  and  of  distribution.  What  ought  to  be 
the  system  adopted  in  each  special  case  must  be  decided 
by  reference  to  both  moral  and  economic  conditions.  As- 
suming that  the  partition  of  the  burden  should  be  a  'just' 
one,  we  must  estimate  its  true  weight  and  the  share  really 

R 


242  PUBLIC    FINANCE.  [BOOK  III. 

borne  by  each  citizen  before  we  can  come  to  a  conclusion 
for  or  against  any  proposed  arrangement. 

The  necessity  of  constantly  appealing  to  the  theorems  of 
economists  has  made  the  study  of  taxation  almost  a  part 
of  applied  political  economy  ;  but,  notwithstanding  that  this 
is  the  favourite  English  method  of  treatment,  it  is  far  better 
to  discuss  it  as  a  part  of  the  wider  subject  of  Public  Finance, 
since  its  origin  and  growth  are  in  this  way  better  under- 
stood, and  the  unquestionably  close  relation  between  the 
several  departments  of  Public  Finance,  can  only  thus  receive 
due  recognition. 

§  2.  At  the  commencement  of  our  examination  questions 
of  definition  and  classification  present  themselves  in  em- 
barrassing number.  Administrative  practice  andveconomic 
theory  are  both  in  part  responsible  for  this  difficulty. 
Terms,  apparently  of  the  utmost  simplicity,  have  been  and 
are  used  with  a  variety  of  meaning  that  is  all  the  more 
confusing  because  of  the  strong  points  of  connexion  between 
the  different  uses. 

Discussions  as  to  the  meaning  of  terms  are,  it  need  not 
be  said,  hardly  ever  purely  verbal  :  they  in  almost  every 
case  turn  on  different  conceptions  of  facts,  or  different 
modes  of  grouping  the  objects  under  notice.  The  literature 
of  Finance,  especially  in  Germany,  is  rich  in  examples, 
and  some  of  the  best  known  doctrines  derive  a  great  deal 
of  their  authority  from  some  particular  application  of  an 
ambiguous  word.  To  clear  up  our  terminology,  or  at  least 
to  explain  the  use  of  the  terms  we  employ,  is  an  indispens- 
able step  in  the  investigation. 

§  3.  First  of  all  we  have  to  settle  the  meaning  of  the 
word  *  Tax.'  This  term,  so  clear  and  simple  to  the  ordinary 
citizen,  has  been  very  variously  defined,  sometimes  at 
astonishing  length,  and  often  with  the,  it  may  be  un- 
conscious, design  of  aiding  a  particular  theory  as  to  the 
character  of  the  facts  denoted  by  it.  The  following  defi- 
nition is,  we  believe,  correct  and  quite  in  accordance  with 
the  realities  of  Finance  and  Politics:  it  has  the  further 


CHAP.  I.]  DEFINITION    OF   TAXATION.  243 

advantage  of  not  implying  unfairly  any  special  view  respect- 
ing the  nature  or  justice  of  taxation. 

f  A  tax  is  a  compulsory  contribution  of  the  ivealth  of  a  u\ 
\terson  or  body  of  persons  for  the  service  of  the  public  powers. 
Each  term  in  this  definition  is  significant,  and  helps  to 
explain  the  object  defined.  First,  a  tax  is  '  compulsory.' 
This  does  not  mean  that  all  tax  revenue  is  paid  unwillingly, 
but  merely  that  the  will  of  the  payer  is  legally  immaterial. 
The  amount,  the  mode  and  time  of  levying,  the  persons 
affected  are  all  determined  by  the  sovereign  or  its  delegate, 
and  individual  preferences  or  dislikes  are  allowed  no  place 
in  the  act.  It  thus  appears  that  so-called  voluntary  taxation 
is  not  true  taxation,  which  is  plainly  the  fact ;  for  in  the 
rare  cases  in  which  it  has  been  tried,  society  is  either  in  the 
pre-political  stage  where  the  public  economy  exists  only  in 
a  rudimentary  form,  or  the  system  is  one  of  self-assessment 
supported  by  the  social  rather  than  the  legal  sanction. 
Gifts  may  indeed  be  made  by  individuals  to  the  State,  a 
circumstance  not  without  importance  in  the  history  of 
Finance,  but  they  are  at  present  so  few  as  hardly  to  need 
mention. 

Next,  a  tax  is  a  '  contribution,'  that  is  to  say  it  involves 
a  sacrifice  on  the  part  of  the  contributor.  It  is  quite 
possible  that  some  persons  may  gain  through  the  operation 
of  a  tax  of  which  they  themselves  pay  a  part  ;  but  it  is 
rather  the  operation  of  the  tax  than  its  payment  by  the 
person  affected  that  produces  this  result.  Every  tax  ne- 
cessitates a  deduction  from  the  wealth  of  the  contributor, 
even  though  compensation  may  be  indirectly  brought  about 
through  its  action. 

Thirdly,  the  term  'wealth'  has  to  be  understood  in  a 
wide  sense,  including  *  services '  as  well  as  commodities. 
Military  service  or  forced  labour  for,  say,  repairing  roads 
(corve'es)  is  taxation  quite  as  much  as  payment  of  money  or 
goods.  These  may  be  good  or  bad  forms  of  taxation,  but 
they  must  be  reckoned  in  the  category  of  taxes. 

Again,  all  taxation  is  imposed  on  '  persons.'    This  neces- 

R  2 


244  PUBLIC    FINANCE.  [BOOK  III. 

sarily  follows  from  the  circumstance  that  the  payment  of 
taxation  is  a  duty,  and  persons  only  can  be  liable  to  duties. 
The  proposition  is  apparently  inconsistent  with  the  division 
of  taxes  into  '  personal '  and  '  real,'  and  also  with  the  tax- 
ation of  commodities  so  often  mentioned.  There  is,  how- 
ever, no  opposition  between  the  different  uses.  The  term 
'  real '  taxation  refers  to  the  '  object '  of  taxation  ;  the 
owner  or  ultimate  bearer  is  the  'subject'  of  the  tax,  and 
he  is  a  person.  Taxation  of  commodities  falls  on  the  con- 
sumers or  other  persons  connected  with  the  taxed  articles, 
and  a  similar  analysis  will  apply  to  other  forms  of  taxation. 
The  truth,  though  often  forgotten,  yet  always  holds  good 
that  a  tax  must  ultimately  be  paid  by  someone. 

Fifthly.  Taxation  is  levied  for  the  '  service '  or  '  benefit ' 
The  public  economy  requires  the  supply  of  its  wants,  and 
taxation  is  the  mode  of  meeting  whatever  proportion  of 
those  wants  remains  unsatisfied  from  other  parts  of  the 
public  revenue.  The  produce  of  taxation  has  unfortunately 
been  only  too  often  misapplied,  and  resulted  in  injury 
rather  than  gain  ;  but  the  tax-imposing  body  must  be 
regarded  as  the  final  arbiter  of  the  justice  of  its  wants. 
That  some  requirements  are  evil  makes  them  none  the  less 
requirements  in  the  case  either  of  individuals  or  of  States. 

Finally,  taxation  is  for  the  *  public  powers,'  i.  e.  it  has  to 
meet  the  wants  of  both  central  and  local  governments.  A 
rate  raised  by  the  smallest  parish  is  as  much  a  tax  as  if  it 
were  levied  by  the  Imperial  Parliament.  All  contributions 
to  the  various  organs  of  government  are  taxes  in  the  view 
of  Finance,  whatever  be  their  administrative  name.  Special 
kinds  of  taxation  have  been  often  denounced  as  being  for 
the  benefit  of  classes  or  individuals,  not  for  that  of  the  State. 
Protective  taxes,  e.  g.  have  incurred  this  reproach.  Such 
forms  of  taxation  are,  however,  imposed  in  the  interest, 
or  supposed  interest,  of  the  nation,  and  if  they  yield  any 
revenue  are  so  far  productive  of  gain  to  the  State.  The 
advantage  obtained  by  the  protected  producers  may  be 
regarded  as  equivalent  to  so  much  public  expenditure  in 


CHAP.  I.]  DEFINITION    OF   TAXATION.  245 

their  favour.  It  is  generally  incapable  of  being  estimated, 
but  this  circumstance  is  of  practical,  rather  than  theoreti- 
cal importance.  That  all  taxes  of  equal  pressure  are  not 
equally  advantageous,  either  to  the  State  or  the  community, 
is  too  evident  to  need  formal  assertion.  Otherwise  there 
would  be  no  reason  for  the  selection  of  any  particular  forms. 
§  4.  The  foregoing  definition,  with  the  accompanying 
explanations,  conveys  all  that  is  essential  in  the  idea  of 
taxation,  but  the  numerous  efforts  to  explain  the  term 
deserve  some  further  notice.  Many  of  the  ablest  writers 
on  the  subject  have  given  definitions  which  substantially 
agree  with  that  stated  in  the  preceding  section.  Thus  De 
Parieu  defines  taxation  as  '  the  charge  levied  by  the  State 
on  the  property  or  labour  of  the  citizens,  in  order  to  pro- 
vide for  the  public  expenses  ; '  Roscher  asserts  that  taxes 
are  '  the  contributions  which  individual  economies  must 
pay,  in  consequence  of  their  dependence,  to  the  State 
province,  commune,  &c.,  or,  generally  the  particular  col- 
lective compulsory  economy  placed  over  them  in  order  to 
assist  in  satisfying  the  financial  needs  of  the  receivers. 
According  to  Cossa,  a  'tax  is  that  part  of  the  wealth  of 
private  individuals  which  the  authority  of  the  State,  pro- 
vince, or  municipality  appropriates  in  order  to  provide  for 
the  public  expenses  incurred  for  the  advantage  of  the 
general  body  of  tax-payers  V  To  these  definitions  it  is 
not  here  desirable  to  add  the  many  others  that  generally 
agree  with  them  ;  but  we  ought  to  consider  some  of  the 
doubtful  variations  in  the  formal  statements  of  the  nature 
of  taxation.  One  of  these  is  suggested  by  the  last  clause 
of  the  definition  just  quoted  from  Cossa.  '  Incurred  for 
the  advantage  of  the  general  body  of  tax-payers '  contains 
a  reminiscence  of  the  once-established,  and  still  generally 
popular,  doctrine  that  taxes  are  the  price  paid  for  the 
services  of  the  public  authorities.  This  way  of  looking  at 
the  facts  was  quite  in  harmony  with  the  political  doctrines 
of  the  seventeenth  and  eighteenth  centuries.  Belief  in  a 

1  De  Parieu,  i.  5  ;  Roscher,  §  33  ;  Cossa  ^Am.  Trans.),  50. 


246  PUBLIC    FINANCE.  [BOOK  III. 

compact  between  the  ruler  and  his  subjects  led  naturally 
to  the  contemplation  of  taxation  as  simply  a  payment  for 
service  done.  The  citizen  received  security  and  paid  its 
price  in  taxation.  The  immediate  advantage  of  this  doc- 
trine, as  placing  a  limit  to  arbitrary  exactions  and  tending 
to  increase  security  is  apparent,  and  there  is  accordingly 
no  reason  for  surprise  when,  in  some  form  or  other,  the 
idea  of  exchange  is  associated  with  the  payment  of  taxes. 
In  Montesquieu's  opinion  '  the  revenues  of  the  State  are 
the  portion  of  his  property  that  each  citizen  gives  in  order 
to  have  security  for  the  remainder,  or  to  enjoy  it  in  com- 
fort.' Here  the  conception  of  payment  to  escape  further 
demands  is  combined  with  that  of  return  for  services 
rendered.  The  French  National  Assembly  gives  still 
another  variation  in  its  reference  to  taxation  as  '  the  com- 
mon debt  of  all  citizens,  and  the  price  of  the  advantages 
that  society  affords  them.'  From  this  it  is  not  far  to  the 
assertion  of  Proudhon  that  '  Taxation  is  an  exchange  in 
which  the  State  gives  services  and  the  contributor  money1.' 
Hardly  distinguishable  is  the  belief  that  taxation  is  the 
insurance  premium  against  the  risks  of  social  disorder  set 
forth  in  Mirabeau's  proposition  that  '  Taxation  is  only  an 
advance  to  obtain  protection  for  social  order.'  The  desire 
to  present  a  ready  justification  of  the  arrangements  of 
society  finds  an  illustration  in  these  attempts  to  depict 
taxation  as  a  quid  pro  quo. 

To  show  that  this  way  of  explaining  taxation  is  incorrect 
is  not  difficult.  The  assertion  that  taxes  are  purely  a 
return  for  services  rendered  is  plainly  untrue.  We  shall 
see  that  there  is  no  possibility  of  measuring  precisely  the 
most  important  of  the  benefits  rendered  by  the  State. 
Security  against  aggression  is,  literally  speaking,  an  '  incal- 
culable '  good.  Social  order  cannot  be  sold  by  retail  like 
tea  or  sugar,  and  so  is  it  with  the  other  state  functions, 
even  the  purely  economic  ones.  Indeed,  it  would  be  very 

1  Montesquieu,  Liv.  xiii.  ch.  i  ;  Stourm  in  Dictionnaire  d"1  Economic  Politiqtie, 
art.  'Impots,'  ii.  3  ;  cp.  Leroy  Beaulieu,  i.  113. 


CHAP.  I.]  DEFINITION    OF   TAXATION.  247 

near  the  truth  to  say  that  the  difficulty  of  applying  the 
normal  method  of  purchase  makes  a  given  form  of  activity 
suitable  for  state  management  ;  if  defence  and  justice 
could  be  readily  bought  and  paid  for,  we  might  trust  to 
private  enterprise  for  a  sufficient  supply.  Wherever  the 
benefit  to  the  individual  can  be  even  approximately  esti- 
mated there  is  a  strong  presumption  in  favour  of  levying 
the  cost  incurred  from  him  and  converting  the  tax  into  a 
'fee.'  Special  reasons  may  make  it  desirable  that  this 
charge  should  be  compulsory.  The  citizen  may  be  so 
neglectful  of  his  true  interest  as  to  omit  obtaining  the  best 
appliances  for  the  purposes  of  health  or  education,  but  even 
in  these  cases  there  is  also  a  general  interest  which  fur- 
nishes the  principal  ground  for  the  intervention  of  the 
State. 

The  opposition  between  free  payment  and  taxation  is  a 
marked  one  not  to  be  evaded  by  the  introduction  of  a 
vague  idea  of  exchange  of  services  as  including  both,  and 
any  definition  of  taxation  that  implies  or  expressly  states 
this  combination  is  so  far  erroneous.  Like  the  general 
doctrine  of  the  social  contract  its  practical  convenience  as 
a  weapon  on  the  side  of  liberty  cannot  conceal  its  scientific 
weakness.  The  equivalence  between  the  amount  of  taxes 
paid  and  the  benefits  obtained  is  rather  to  be  found  in  the 
case  of  the  community  as  a  whole  than  of  any  special  part 
of  it.  Looking  at  the  public  agencies  from  this  point  of 
view,  it  is  well  to  consider  whether  the  advantages  of 
government  are  a  compensation  for  its  cost,  and  this  test 
should  be  steadily  applied  in  judging  the  merits  of  any 
proposed  expenditure.  The  question  in  truth  belongs  to 
that  department  of  Public  Finance.  Once  expenditure  has 
been  incurred  the  imposition  of  taxation  in  order  to  meet 
it  is  a  matter  of  course.  We  have  accordingly  considered 
it  in  its  fit  connexion  J.  In  any  case,  to  introduce  what  is 
at  best  a  highly  disputable  doctrine  into  the  definition  of  so 
important  a  term  is  altogether  a  mistake. 
1  Ste  Bk.  i.  ch.  8.  §  4  sq. 


248  PUBLIC    FINANCE.  [BOOK  III. 

§  5.  Other  definitions  of  taxation  fail  through  excessive 
vagueness.  We  gain  little  by  being  told  that  taxation 
is  'a  public  charge,  a  duty  imposed  on  certain  things'1.  Very, 
often  one  or  more  of  the  essential  elements  is  omitted. 
Thus  the  fact  of  taxation  falling  solely  on  persons  is 
neglected  in  the  definition  of  taxes  as  '  the  enforced  pro- 
portional contribution  of  persons  or  property  levied  by  the 
authority  of  the  State  for  the  support  of  government  and 
for  all  public  needs ' 2.  Besides  the  error  of  including 
'  property '  as  a  subject  of  taxation,  this  definition  brings 
in  the  unessential  principle  of  '  proportionality/  and  would 
therefore,  exclude  large  groups  of  what  are  universally 
regarded  as  taxes.  This  is  a  very  common  defect  in  the 
definition  of  the  term  due  to  the  desire  to  give  an  exhaus- 
tive account  of  its  attributes,  or  to  bring  some  favourite 
theory  into  its  general  conception.  Professor  Ely's  elaborate 
account,  like  those  of  many  German  writers,  illustrates  this 
danger  3.  The  real  function  of  a  definition  is  to  give  a  clear 
idea  of  the  nature  and  limits  of  the  phenomenon  denoted 
by  the  term,  not  to  convey  in  a  formal  statement  all  that 
is  known  about  it,  still  less  to  prejudge  the  questions  that 
may  arise  in  the  course  of  further  inquiry. 

§  6.  The  etymologies  of  the  words  employed  in  different 
languages  to  denote  this  class  of  public  contributions  are 
full  of  instruction.  The  English  '  tax/  as  also  its  equiva- 
lent in  local  Finance  'rate,'  suggests  the  estimation  or  fixing 
of  the  amount  of  charge.  So  does  the  German  *  Schdtzung? 
The  assistance  or  advantage  to  the  State  is  foremost  in  the 

1  The  definition  of  the  dictionary  of  the  French  Academy. 

2  Quoted  from  Cooley  by  Ely,  Taxation,  4. 

tj>  l  Taxes  are  simply  one-sided  transfers  of  economic  goods  or  services  de- 
manded of  the  citizens,  and  occasionally  of  those  who  are  not  citizens,  but  who 
nevertheless  are  within  the  reach  of  the  taxing  power,  by  the  constituted 
authorities  of  the  land  for  meeting  the  expenses  of  government  or  for  some 
other  purpose,  with  the  intention  that  a  common  burden  shall  be  maintained  by 
common  contributions  or  sacrifices,'  Taxation,  6-7  ;  cp.  the  definition  given 
by  Wagner,  ii.  210,  which  brings  in  the  complication  of  a  distinction  between 
'pure  financial'  and  politico-social  taxation;  also  i.  499-500,  where  'taxes' 
are  marked  off  from  '  fees '  (Gebiihreri)  by  their  '  general '  character. 


CHAP.  I.]  CLASSIFICATION   OF   TAXATION.  249 

French  '  aide '  and  the  German  'Steuer.'  The  idea  of  com- 
pulsion is  primary  in  *  impot'  and  'Atiflage.'  The  surrender 
by  the  payer  is  connoted  in  *  tributuni  ldazio'  and  *  Abgabel 
while  finally  the  root  of  taxation  in  voluntary  payment 
is  evidenced  by  the  words  *  donum  '  and  '  benevolence? 
Minute  investigation  may  show  that  there  are  differences  in 
the  charges  described  by  these  several  names,  but  speaking 
broadly  they  all  cover  what  we  regard  as  taxation,  and 
help  to  justify  the  definition  given  above T. 

§  7.  Having  determined  the  meaning  of  *  taxation,'  it  is 
necessary  to  understand  its  chief  classifications  and  the 
technical  terms  employed  respecting  it.  First,  we  may 
notice  the  term  '  subject,1  which  is  conveniently  used  to 
denote  the  person  who  bears  its  burden,  and  who  must  be 
distinguished  from  the  immediate  payer,  e.  g.  the  importer 
of  wine  in  England  pays  the  duty  on  it,  but  the  '  subjects  ' 
of  the  wine  duties  are  the  consumers  so  far  as  the  charge  is 
really  a  pressure  on  them.  The  '  subject '  and  the  payer 
may  or  may  not  be  the  same  according  to  the  particular 
circumstances. 

As  the  'subject'  of  taxation  is  the  person  affected,  so 
the  'object'  is  the  thing  or  fact  on  which  it  is  imposed, 
thus  in  the  example  just  given  of  the  wine  duties,  the  com- 
modity wine  would  be  the  object  of  the  duty.  Even  where 
taxation  is  said  to  be  '  personal  *  it  is  assessed  on  some 
object  as  '  income  '  or  *  produce,'  or  in  the  extreme  instance 
of  a  capitation  or  poll-tax  on  the  person  as  a  physical  body. 
Confusion  between  the  '  subject '  and  '  object '  is  the  cause  of  1 
the  belief  that  some  taxation  does  not  fall  on  persons  2. 

The  '  source*  of  taxation  has  somewhat  the  same  relation 
to  its  'object'  as  the  ultimate  bearer  or  subject  to  the 
immediate  payer.  The  fund  created  by  taxation  is. derived 
from  the  resources  of  the  community,  i.  e.  as  we  shall  see 
from  the  income,  or  in  special  instances  the  property,  of  the 

1  Cp.  Roscher,  §  33 ;  Wagner,  ii.  223. 

2  This  mistake  is  somewhat  like  that  committed  by  Blackstone  in  speaking  of 
'  the  rights  of  things '  (Jus  reruni}. 


250  .  PUBLIC    FINANCE.  [BOOK  III. 

'  subjects.'  There  has  been  much  dispute  as  to  the  real 
'  source '  of  the  tax-revenue  that  will  need  consideration 
later  on,  but  there  is  no  doubt  as  to  the  proper  use  of  the 
term  '  source  '  in  respect  to  taxation.  It  is,  perhaps,  unne- 
cessary to  mention  the  terms  '  unit '  and  '  rate  '  which  are 
employed,  the  former  to  describe  the  quantity  of  the  objects 
taken  as  a  standard,  the  latter  the  amount  of  taxation  per 
'  unit.'  Where  commodities  are  taxed  the  unit  will  be  a 
measure  of  weight,  e.  g.  the  Ib,  as  in  the  British  tea  duty, 
or  contents  as  the  gallon  in  the  wine  duty,  or  length  as  in 
the  old  duties  on  cottons.  A  sum  of  the  standard  money 
is  the  commonest,  as  in  the  system  of  ad  valorem  duties  *. 

§  8.  A  much  more  important  set  of  terms  is  that  con- 
nected with  the  classification  of  taxation.  The  division 
and  grouping  of  the  several  kinds  of  taxes  have  been  varied 
to  suit  particular  financial  systems,  and  much  of  the  general 
discussions  on  the  subject  is  concerned  with  the  compara- 
tive merits  of  these  arrangements,  and  the  extent  to  which 
they  conform  to  the  natural  order  so  far  as  it  can  be  said  to 
exist.  A  preliminary  notice  of  some  of  the  more  common 
distinctions  is  desirable  at  the  present  stage. 

One  of  the  most  widely  known  and  frequently  used 
divisions  of  taxation  is  that  into  '  direct '  and  '  indirect ' ; 
unfortunately  it  is  used  in  different  senses,  thougH  with 
several  points  of  connexion.  That  most  familiar  to  English 
readers  is  stated  by  J.  S.  Mill  in  the  following  terms  :— 

'Taxes  are  either  direct  or  indirect.     A  direct  tax  is  onev 
which  is  demanded  from  the  very  persons  who  it  is  intended 
or  desired  should  pay  it.     Indirect  taxes  are  those  which  4 
are  demanded  from  one  person  in  the  expectation  and  in- 
tention that  he  shall  indemnify  himself  at  the  expense  of 
another  V 

The  difference  is  here   made  to   turn  on  the  mode  of 

1  Cp.  Roscher,  §  33  ;  Wagner,  ii.  226-8  ;  Schaffle,  Stetierpolitik,  52-3,  for 
the  use  of  these  terms  in  German  Finance.  The  use  of  '  subject '  in-  the  text 
differs  from  that  of  the  above  writers,  as  they  apply  it  to  the  person  legally 
responsible  for  payment. 

*  Principles,  Bk.  v.  ch.  3.  §  i. 


CHAP.  I.]  CLASSIFICATION   OF   TAXATION.  251 

i/ 

incidence,  a  matter  often  very  difficult  to  determine,  and 
changing  with  the  special  circumstances  of  each  case. 
Whatever  be  its  economical  importance,  it  is  evidently 
useless  for  administrative  purpose's,  and  probably  owes  its 
origin  to  the  peculiar  theory  of  the  Physiocrats  respecting 
the  '  source '  of  taxation. 

A  natural  result  has  been  that  practical  financiers  have 
adopted  a  different:  basis  of  distinction,  and  regard  those 
taxes  as  direct  which  are  levied  on  permanent  and  recurr- 
ing occasions  ;  while  charges  on  occasional  and  particular 
events  are  placed  under  the  category  of  indirect  taxation. 
On  either  method  the  income  tax  would  be  '  direct,'  and 
the  excise  and  customs  '  indirect ' :  the  '  death  duties  '  would 
be  '  direct '  from  Mill's  point  of  view,  and  '  indirect '  in  the 
administrative  sense *.  ( 

Another  division  is  that  into  'taxes  on  revenue'  and 
{ taxes  on  capital,'  or,  perhaps  better,  on  '  property.'  The 
former  are  paid  out  of  the  annual  national  production  ;  the 
latter  encroach  on  the  accumulated  wealth  of  the  society. 
But  in  qualification  of  this  statement  it  must  be  added  that 
most  of  the  actual  property  or  capital  taxes  are  so  only  in 
name,  being  really  paid  out  of  the  income  of  the  persons 
subject  to  the  charge.  There  is  thus  a  discordance  between 
the  practical  and  scientific  use  of  these  terms  as  great  as  in 
the  case  of  direct  and  indirect  taxation. 

Taxes  are  often  said  to  be  either  '  real '  or  '  personal,' 
and  attempts  have  been  made  to  distribute  them  into  two 
classes  on  this  basis.  Personal  taxes  are  those  in  which 
the  person  is  taken  note  of  in  assessment.  They  require 
lists  of  the  tax-payers  (roles  nominatives  in  the  language  of 
French  administrators).  Real  taxes  are  assessed  on  objects 
other  than  persons,  and  without  direct  reference  to  the 
owners  or  possessors.  Capitation  and  income  taxes  are 
'  personal ';  taxes  on  land,  houses,  or  goods,  are  '  real.'  The 
use  of  these  terms  has  the  inconvenience,  already  noticed, 

1  For  further  discussion  of  the  questions  here  raised  see  Bk.  iii.  ch.  4,  '  The 
Tax  System,  its  Forms.' 


252  PUBLIC   FINANCE.  •     [BOOK  III. 

of  obscuring  the  fact  that  all  taxation  is  in  the  last  resort 
on  persons,  and  further  raises  a  particular  form  of  levy  into 
undue  importance.  An  income  tax  is  certainly  personal, 
but  Schedule  A  of  the  English  income  tax  is  very  similar 
to  the  French  impot  fonder  that  is  as  certainly  '  real.' 

In  respect  to  the  mode  of  assessment  taxes  may  be 
either  '.rated '  or  '  apportioned  V  In  the  former  class  the 
charge  per  unit  is  fixed,  but  the  total  yield  is  always  un- 
certain, depending  as  it  does  on  the  number  of  units  that 
pay.  An  apportioned  tax  is  one  the  total  amount  of  which  is 
fixed,  the  shares  being  apportioned  among  the  objects  that 
are  charged.  As  examples  the  English  income  tax  and 
the  French  impot  fonder  will  again  serve.  The  former  is 
'  rated,'  the  latter  '  apportioned/  being  so  divided  among 
the  departments  as  to  make  up  the  previously  fixed  amount. 
This  method  is  decidedly  the  more  primitive :  it  has  dis- 
appeared long  ago  from  the  English  system,  and  will 
probably  meet  the  same  fate  elsewhere 2. 

§  9.  The  foregoing  distinctions  are  too  important  to  be 
passed  over,  but  they  are  also  too  imperfect  to  be  of  much 
use  in  a  scientific  classification  of  taxes.  Particular  aspects 
of  taxation,  the  administrative  peculiarities  of  certain  coun- 
tries, and  obsolete  or  imperfect  theories  have  been  the 
causes  of  their  employment.  It  is  accordingly  advisable  to 
consider  the  subject  from  a  more  general  point  of  view  in 
order,  as  far  as  possible,  to  reach  a  natural  arrangement. 

In  choosing  the  principle  of  grouping  we  have  to  make  a 
selection  between  two  contrasted  systems  which  may  be 
distinguished  as  (i)  the  economical  and  theoretical,  and  (2) 
the  empirical  or  fiscal  modes. 

The  first  mentioned  depends  on  the  economical  theory  of 
the  distribution  of  wealth,  and  can  be  traced  back  at  least 
to  Adam  Smith.  He  opens  his  discussion  of  taxation  by 

*  These  terms  seem  to  be  the  least  unsuitable  equivalents  of  the  French 
impdts  de  quotite  and  impdts  de  repartition. 

''  The  old  English  '  tenths  and  fifteenths '  and  the  later  '  subsidies '  were 
apportioned.  Dowell,  i.  88.  The  recent  change  in  the  French  house  duty  is  an 
illustration  of  the  tendency  to  abandon  the  system. 


CHAP.  I.]  CLASSIFICATION    OF   TAXATION.  253 

asserting  that  'the  private  revenue  of  individuals  arises 
ultimately  from  three  different  sources- — rent,  profit,  and 
wages,  and  proceeds, '  every  tax  must  finally  be  paid  from  one 
or  other  of  those  different  sources  of  revenue,  or  from  all  of 
them  indifferently.  .  .  .  The  particular  consideration 
of  each  of  these  different  sorts  will  divide  the  second  part 
of  the  present  chapter  into  four  articles  V  Nothing  can  be 
plainer  and  simpler  in  appearance  than  this  arrangement. 
The  economic  shares  in  distribution  are  regarded  as  so 
many  sources  of  revenue  on  one  or  more  of  which  every 
tax  must  fall.  The  later  analysis  of  profit  into  the  com- 
ponent parts  of  *  interest '  and  '  employer's  gain '  would  add 
one  further  source,  but  would  not  otherwise  disturb  the 
treatment 2.  The  great  attraction  of  this  method  is  its 
simplicity  and  the  facilities  that  it  affords  for  employing 
the  propositions  of  Economics  in  deducing  the  effects  of 
taxation.  To  reduce  the  subject  into  '  four  articles  '  even 
with  *  several  other  subdivisions,'  promises  a  welcome  abridg- 
ment of  labour.  English  economists  in  treating  of  taxation 
have,  therefore,  intended,  as  far  as  possible,  to  follow  th:s 
course.  Ricardo  and  J.  S.  Mill  are  the  most  prominent 
examples.  But  on  closer  examination  it  appears  that 
neither  of  them,  nor  even  Adam  Smith  himself,  could 
adhere  consistently  to  this  over-simple  grouping.  In 
Ricardo's  hands  the  subject  requires  eleven  chapters, 
several  of  which  consider  the  effects  of  taxes  on  land, 
houses,  raw  produce,  and  gold,  in  addition  to  those  on  the 
primary  sources  of  rent,  profit  and  wages.  Mill  goes  fur- 
ther, and  formally  limits  the  division  of  taxes  according  to 
the  economic  source  on  which  they  are  imposed  to  direct 
taxation  on  income  3.  The  taxation  of  commodities  and 

1  347- 

2  It  is  noteworthy  that  Adam  Smith  makes  this  separation  in  his  account 
of  taxes   on  profit  :    '  The   revenue    or  profit   arising   from    stock    naturally 
divides  itself  into  two  parts,  that  which  pays  the  interest  and  which  belongs  to 
the  owner  of  the  stock,  and  that  surplus  part  which  is  over  and  above  what  is 
necessary  for  paying  the  interest,'  357. 

3  Bk.  v.  ch.  3.  §  i. 


254  PUBLIC    FINANCE.  [BOOK  III. 

such  taxes  as  those  on  contracts  and  on  communication 
are  quite  outside  it.  But  the  Wealth  of  Nations  affords  a 
stronger  proof  of  the  insufficiency  of  the  ground  of  division 
selected  by  its  author.  Sections  devoted  to  taxes  on  pro- 
duce of  land,  on  the  profit  rent,  and  the  ground  rent  of 
houses,  to  capitation  taxes,  and  taxes  on  commodities,  break 
up  the  compact  order  that  the  introduction  holds  out.  It 
is  evident  that  the  subject-matter  refused  to  fit  into  the 
limited  groups  that  the  economic  classification  required, 
and  the  sound  common  sense  so  characteristic  of  Adam 
Smith  is  shown  by  his  deviations  from  the  theoretic  lines 
previously  traced  out  by  him. 

The  difficulty  arises  from  the  fact  that  taxation  always 
has  persons  for  its  '  subjects,'  and  they  frequently  derive 
their  income — the  normal  i source'  of  taxation — from  more 
than  one  of  the  different  economic  shares.  The  citizen  is 
not  a  pure  rent,  interest,  or  wages  receiver,  he  often  com- 
bines all  three  in  his  annual  receipts.  Again,  the  most 
prominent  external  feature  of  taxation  is  the  *  object '  on 
which  it  is  levied.  These  are,  however,  very  many,  and  it 
is  often  beyond  the  power  of  analysis  to  decompose  the 
charge  on  some  commodity  or  form  of  receipt  into  its 
economic  constituents,  e.  g.  the  produce  of  land  may  be 
due  to  the  co-operation  of  natural  agents,  capital,  labour, 
and  directing  ability,  but  to  say  how  much  of  the  taxation 
imposed  on  the  result  is  due  to  each  factor  is  quite  im- 
possible. 

The  obvious  conclusion  is  that  the  classification  is 
unsuitable.  It  is  often  convenient  to  use  the  economic 
theorems  respecting  rent,  wages,  &c.,  in  our  investigations 
of  the  effects  of  taxation,  even  though  we  should  never 
meet  in  fact  with  the  pure  taxes  on  those  parts  of  the 
product.  For  the  problems  of  Finance  it  is  also  necessary 
to  remember  that  these  preliminary  inquiries  are  but  steps 
towards  the  final  result  which  must  deal  with  realities, 
and  not  with  imaginary  and  hypothetical  cases. 

§  10.  The  defects  of  the  economical  mode  of  classifica- 


CHAP.  I.]  CLASSIFICATION    OF   TAXATION.  255 

tion  lead  us  to  turn  to  what  we  have  entiilecLthe  'empirical ' 
or  *  fiscal'  one,  which  takes  the  actual  kinds  of  taxation, 
and  arranges  them  in  the  most  convenient  way.  To  this 
procedure  it  may  at  once  be  objected  that  as  each  country 
has  its  own  tax  system,  varying  from  time  to  time,  we 
cannot  attain  to  a  general  arrangement  valid  in  all  cases. 
The  classification  of  taxes  suited  for  ancient  Rome  would 
be  inadequate  in  modern  England,  and  even  confining 
attention  to  the  present  day,  the  Indian  and  British  tax 
systems  cannot  be  easily  reduced  to  the  same  classification. 
This  effect  of  temporary  circumstances  in  limiting  general 
principles  has  been  already  noticed  J,  and  it  does  at  first 
sight  raise  difficulties  in  the  effort  to  prepare  a  natural 
grouping  of  taxes.  The  mode  of  escapes,  however,  obvious 
on  a  little  consideration.  The  names  and  minute  details  of 
taxation  vary  greatly  at  different  times  and  places,  but 
this  does  not  preclude  the  existence  of  large  categories  of 
taxation  possible  in  all  countries  and  found  in  somewhat 
different  forms  in  many.  The  Indian  land  revenues  differ 
from  the  English  land  tax,  and  also  from  the  French 
impot  fonder,  but  in  all  three  countries  there  is  'taxation 
of  land,'  which  offers  a  general  title,  under  which  they  may 
be  placed  in  company  with  the  Roman  provincial  tax  and 
several  others.  A  like  mode  can  be  applied  to  different 
forms  of  taxes  on  the  produce  of  industry,  and  so  in  other 
cases. 

The  question  next  arises,  How  far  should  this  process  be 
carried  and  what  general  categories  can  we  form  ?  Ran 
has  boldly  grouped  all  taxes  under  the  two  heads  of 
'  estimated  taxes'  usually  charged  on  goods  {Schatzungen) 
and  ;  taxes  on  expenditure'  {Aufwandsteueni)  which  does 
not  carry  us  much  beyond  the  rude  divisions  mentioned  in 
§  8,  Hoffmann  prefers  the  division  into  taxes  on  posses- 
sion (Besitz]  and  taxes  on  acts  (Handlungen],  while  Cohn 
accepts  the  tripartite  arrangement  of  Wagner,  into  taxes  on 
(a)  acquisition  (Erwerti),  (b)  possession  (Besitz)  and  (c]  con- 

1  See  Introduction,  Part  i.  §  8. 


256  PUBLIC   FINANCE.  [BOOK  III. 

sumption  (  Verbraucti) 1.  De  Parieu  carries  out  the  division 
more  minutely,  and  forms  five  classes  of  taxes,  viz.  (i)  on 
persons,  (2)  on  wealth,  (3)  on  enjoyment,  '4)  on  consump- 
tion, (5)  on  acts.  In  defence  of  this  arrangement  he  argues 
that,  like  all  natural  classifications,  it  allows  of  an  indefinite 
margin  between  each  adjacent  group,  and  that  it  further 
harmonizes  with  the  administrative  division  between  direct 
and  indirect  taxation,  classes  I,  2  and  3  belonging  to  the 
former  and  classes  4  and  5  to  the  latter  category2. 

All  the  preceding  classifications  appear  to  have  at  least 
two  defects  :  for  (i)  they  simply  deal  with  certain  external 
features  of  taxes,  and  do  not  take  note  of  their  essential 
characteristics,  and  (2)  like  the  otherwise  very  different 
arrangement  of  Adam  Smith,  they  are  too  simple  for  the 
complexity  of  the  facts  to  which  they  are  applied.  Hock 
has  attempted  to  avoid  this  defect.  He  starts  from  the 
untenable  position  that  taxation  is  a  compensation  for 
state  services.  These  services  are,  he  thinks,  of  three 
kinds,  to  wit;  (i)  protection  of  person,  (2)  of  property, 
and  (3)  the  performance  of  special  services.  To  each  cor- 
responds a  'primitive  tax'  (Ur 's teuer) :  these  are  (i)  per- 
sonal taxes,  (2)  income  taxes,  (3)  taxes  for  special  services 
rendered  3.  The  practical  difficulties  in  levying  these  taxes 
in  their  pure  form  leads  to  the  use  of  other  taxes  as  sub- 
stitutes {Surrogate)  in  the  form  of  taxes  on  (a)  consumption, 
(b]  product,  (c)  customs,  (d)  special  income  taxes,  (e)  fees 
and  charges  on  occupations  4. 

Though   it    is    plain   that   the  ground   idea   of  Hock's 

1  Ran,  i.  §  292;    Hoffmann,   Lehre  von  den  Steuern,  69;    Cohn,   §   332; 
Wagner,  ii.  233  sq.,  515. 

2  De  Parieu,  i.  12-14. 

8  Abgaben  und  Schtilden,  15-17. 

*  Ib.  82  sq.  Stein's  classification  of  taxes  into  (i)  direct,  (2)  indirect,  and  (3)  in- 
come taxes — the  first  falling  on  capital,  the  second  on  labour,  and  the  last  on  indi- 
vidual economic  activity — is  decidedly  unsatisfactory  ;  nor  are  the  subdivisions 
better.  Thus  the  direct  taxes  are  divided  by  him  into  those  on  (a)  produce, 
(^)  acquisition,  (c)  'commerce,  but  the  land  tax  comes  under  (a)  and  the  industry 
taxes  under  (3),  though  the  latter  are  evidently  produce  taxes.  Stein,  ii.  495  sq., 
and  iii.  passim. 


CHAP.  I.]  CLASSIFICATION   OF   TAXATION.  257 


division  is  unsound  it  yet  has  the  merit  of  suggesting  the 
best  way  of  reaching  a  truly  natural  arrangement.  The 
distinction  between  primitive  and  derived  taxes  is  a 
valuable  one,  and  can  be  used  to  combine  the  economical 
and  empirical  methods  of  grouping  in  our  arrangement. 

§11.  The  position  of  Adam  Smith  that  taxation  must 
be  derived  from  the  constituents  of  private  income  is  un- 
doubtedly sound.  Where  it  falls  on  property  there  is  a 
diminution  of  the  national  wealth  which,  if  continued,  must 
prove  destructive.  A  true  instinct  therefore  prompted  him 
in  his  effort  to  analyze  taxes  into  those  on  rent,  on  wages, 
and  on  profit.  On  the  other  hand  it  is  equally  true  that 
the  '  objects '  of  taxation  do  not  easily  allow  of  this 
analysis.  Between  the  taxes  of  economical  theory  and 
the  taxes  of  actual  Finance  there  is  a  gulf  that  appears 
hard  to  bridge  over,  and  one  that  has  retarded  the  progress 
of  financial  science. 

This  difficulty  is  at  all  events  extenuated  by  the  circum- 
stance that  though  the  abstract  economic  taxes  are  not  met 
with  in  fact,  they  are  not  wholly  imaginary.  The  economic 
tax  on  rent  has  some,  and  often  considerable  resemblance 
to  a  land  tax,  or  to  put  it  the  other  way,  a  land  tax  often 
tends  to  become  a  tax  on  rent.  The  e  tax  on  profit '  of  the 
economic  text  books  bears  a  like  relation  to  the  taxes  on 
business,  of  which  Schedule  D  of  the  English  income  tax, 
the  Prussian  Gewerbesteuer  and  the  French  patentes  may  be 
taken  as  specimens.  So  with  the  wages  tax,  in  relation  to 
actual  capitation  taxes,  or  the  late  Classensteuer  of  Prussia. 
If  now  we  regard  taxes  on  the  factors  of  production,  and  there- 
fore on  the  shares  in  distribution  as  '  primary,'  we  have  a 
basis  from  which  to  proceed  to  the  investigation  of  those 
secondary  taxes  that  are  placed  on  other  '  objects.'  By 
grouping  together  the  various  taxes  on  land  we  can  con- 
sider the  play  of  financial  forces  in  the  case  of  rent.  The 
industrial  taxes  will  similarly  enable  us  to  see  the  working 
of  charges  on  interest  and  profit,  and  finally  poll  and  capita- 
tion taxes  will  perform  the  same  service  for  taxes  on  wages. 

S 


258  PUBLIC    FINANCE.  [BOOK  III. 

The  economic  mode  of  arrangement  assigns  a  place  to 
taxes  on  income  or  revenue  which  we  regard  as  a  combina- 
tion of  all  the  primary  forms.  It  might  in  certain  cases  be 
admissible  to  break  up  an  income  tax  into  its  component 
parts,  just  as  it  might,  on  the  other  hand,  be  well  to  com- 
bine a  series  of  taxes  that  together  make  up  an  income  tax. 
Thus  the  five  schedules  of  the  English  income  tax  or  the 
four  of  the  Italian  one  might  be  separately  treated,  or  again 
the  'four  direct  contributions'  of  the  French  system  might 
be  taken  in  combination  as  nearly  equivalent  to  a  general 
income  tax1.  Still  it  is  necessary  to  consider  the  fiscal 
bearings  of  general  income  and  property  taxes,  and  this 
discussion  most  fitly  follows  the  examination  of  the  taxes 
on  component  parts  of  income. 

When  the  '  primary,'  and  if  the  phrase  be  admissible, 
'  quasi-primary '  taxes  have  been  discussed,  there  remains 
no  small  number  of  other  charges.  The  whole  elaborate  / 
system  of  taxation  on  commodities  that  has  so  large  a] 
place  in  every  country  must  be  dealt  with.  It  may  be 
regarded  as  taxation  of  consumption  or  of  expenditure, 
but  for  practical  purposes  it  includes  the  two  great  depart- 
ments known  to  English  Finance  as  *  excise  '  and  '  customs/ 
So  far  the  taxes  enumerated  have  appeared  .to  fall  on  the 
production,  the  distribution,  or  the  consumption  of  wealth  ; 
those  that  directly  affect  the  remaining  economic  process 
of  circulation  must  also  be  noticed.  Taxes  on  transport  ^ 
and  communications  come  under  this  head  ;  so  does  the  yet  r, 
more  important  class  of  taxes  on  the  transfer  of  property 
and  the  transactions  of  commerce,  i.  e.  the  '  taxes  on  acts '  of 
De  Parieu's  arrangement.  The  taxation  of  succession  after 
death  may  be  treated  as  a  particular  case  of  transfer,  but  it 
also  has  affinities  with  property  and  income  taxes  which 
must  be  carefully  considered.  In  like  manner  taxes  on 
necessary  commodities  often  resemble  in  their  effects  a  tax 
on  wages  as  Ricardo  with  some  exaggeration  urged.  The 

1  They  are  (i)  Contribution  fonctire,  (2)  Contribtttion  mobiliere,  (3)   Con- 
tribution des  fortes  et fenfires,  (4)  Patentes. 


CHAP.  I.]  CLASSIFICATION    OF   TAXATION.  259 


other  secondary  taxes  have  similar  reactions  on  the  consti- 
tuents of  income,  but,  nevertheless,  their  separate  treatment 
is  desirable  and  indeed  unavoidable. 

§  12.  We  have  now  obtained  what  appears,  on  the  whole, 
a  satisfactory  distribution  of  the  several  taxes.  Briefly 
recapitulated  it  is  as  follows.  The  main  division  is  into 
'  primary '  and  '  secondary.'  The  primary  taxes  comprise 
trifrse  on  land,  on  business  and  capital,  on  persons  and  on 
labourers'  earnings.  The  combination  of  these  primary 
forms  gives  us  the  general  income  and  property  taxes 
which  come  next  in  order.  Passing  to  the  secondary  forms 
of  taxation  we  find  (i)  taxes  on  commodities,  including 
both  excises  and  customs,  (2)  taxes  on  communication  and 
transport,  (3)  taxes  on  transfer  of  property,  (4)  succession 
duties,  (5)  the  remaining  taxes  on  commerce  and  legal 
transactions. 

But  the  discussion  of  the  several  taxes  in  the  foregoing 
order  must  be  postponed  until  we  have  studied  the  opera- 
tion of  taxation  in  general  and  the  conditions  required  for 
its  satisfactory  working.  No  single  tax  can  be  rightly 
appreciated  without  reference  to  the  financial  system  of 
which  it  forms  a  part.  The  chapters  immediately  suc- 
ceeding will  be  devoted  to  a  study  of  the  characteristics 
of  taxation  in  general  and  the  principles  that  should  regu- 
late its  application.  In  this  part  of  Finance  we  meet  with 
the  most  difficult  theoretical  and  practical  questions  which 
require  the  utmost  attention  for  their  proper  understand- 
ing. On  some  points  opinion  is  sharply  divided,  and 
consequently,  while  endeavouring  to  reach  a  definite  judg- 
ment on  each  disputed  question,  we  shall  aim  at  putting 
the  views  of  both  sides  in  their  strongest  form  before  the 
reader. 


S    2 


CHAPTER    II. 

THE  GENERAL  FEATURES  OF  TAXATION. 

§  1.  THE  increasing  importance  of  taxation  as  the  mode 
of  supplying  the  public  wants  is  a  conspicuous  feature  in 
financial  development.  It  is  partly  attributable  to  the  v 
decline  of  the  earlier  forms  of  revenue,  but  far  more  to 
the  great  and  continuous  growth  of  expenditure.  The 
modern  state  is  dependent  on  taxation  to  an  extent 
unknown  in  mediaeval  times.  Hence  all  questions  con- 
nected with  this  department  of  Finance  have  an  enhanced 
interest.  Errors  on  the  subject  or  mistakes  on  the  part  of 
practical  financiers  tend  to  become  more  and  more  serious. 
The  need  of  a  careful  study  of  the  general  features  of  the 
tax  system  is  greater.  Without  a  true  appreciation  of  the 
conditions  under  which  it  works,  it  is  hopeless  to  expect 
the  adoption  of  a  wise  policy  or  determination  in  applying 
it.  Practical  sagacity  has  its  part — and  no  small  one — in 
successful  financial  management,  but  it  is  all,the  more 
effective  when  enlightened  by  the  study  or  principles. 
The  complications  of  modern  financial  systems  make  it  ; 
advisable  to  note  their  chief  characteristics  before  discuss-  \' 
ing  the  comparative  merits  of  the  rules  proposed  for  their 
regulation.  The  phenomena  are  not  so  simple  as  to  admit 
of  regulation  by  a  single  mechanical  rule,  and  the  real 
bearing  of  the  different  propositions  will  be  best  understood 
after  some  acquaintance  with  the  subject-matter  to  which 


CHAP.  II.]      THE   GENERAL  FEATURES   OF  TAXATION.  261 


they  are  applied  and  the  difficulties  that  surround  them. 
The  interaction  of  state  and  national  economy  brought 
about  by  taxation  produces  further  complications  that  will 
not  allow  of  hasty  treatment.  We  shall  therefore  begin  by 
a  study  of  some  of  the  general  features  of  the  tax-system,  a 
knowledge  of  which  is  essential  for  forming  a  correct  judg- 
ment respecting  its  regulation. 

§  2.  Looked  at  in  a  broad  general  way  the  first  circum- 
stance that  strikes  the  observer  is  the  fact  that  taxation 
means  the  subtraction  of  so  much  wealth  from  individual 
enjoyment  or  use.  The  definition  given  in  the  last  chapter 
expresses  this  clearly  by  pointing  out  that  taxes  are  con- 
tributed by  persons  from  their  wealth  for  the  public  service. 
State  expenditure  is  devoted  to  the  supply  of  certain  wants 
of  the  community  or  nation  by  the  action  of  the  public 
powers.  These,  like  all  other  agencies,  cannot  be  obtained 
without  cost  partly  met  by  the  economic  or  quasi-private 
revenue,  but  leaving  a  balance  to  be  supplied  by  taxation. 
It  thus  appears  that  there  is  an  element  of  truth  in  the 
description  of  taxation  as  '  the  expenses  of  production  of 
the  State ' ;  the  phrase,  however,  suggests  too  close  an 
analogy  with  industrial  enterprises,  in  which  the  expenses 
are  repaid  out  of  the  product.  In  respect  to  public  services 
the  benefits  will  in  normal  cases  largely  exceed  the  cost, 
but  the  method  of  calculation  is  not  so  easily  applied,  nor 
is  the  object  in  view  the  attainment  of  profit. 

The  proposition  that  taxation  is  a  form  of  cost  or 
expense  proves  that  it  is  so  far  an  evil  in  the  sense  that 
every  sacrifice  is  such.  It  may  be  necessary  or  advisable, 
but  could  the  object  be  otherwise  accomplished  it  would  be 
still  better.  Any  saving  in  the  expense  of  working  the 
State  enables  a  larger  amount  to  be  left  in  the  possession  of 
the  tax-payers,  and  to  that  extent  improves  their  economical 
position.  The  formal  statement  of  this  very  plain  fact 
might  appear  superfluous  were  it  not  for  the  existence  of 
strong  popular  prejudices  in  favour  of  the  expenditure  of 
funds  derived  from  taxation.  ;  Government  expenditure 


262  PUBLIC    FINANCE.  [BOOK  III. 

gives  employment  and  benefits  the  labourers '  is  the  com- 
monest form  in  which  this  belief  is  asserted.  Without 
entering  into  the  question  how  far  such  expenditure  does 
really  reach  the  labourers,  it  is  sufficient  to  reply  that  the 
persons  from  whom  the  funds  have  been  taken  by  the  tax- 
collector  would  have  certainly  made  use  of  them,  either  in 
the  employment  of  labour,  or  the  purchase  of  commodities. 
The  belief  that  taxation  returns  in  '  a  fertilising  shower '  was 
rightly  regarded  by  Bastiat  as  one  of  the  errors  arising  from 
defective  observation 1.  Hardly  worthy  of  refutation  as  a 
theoretic  doctrine,  its  evil  effect,  particularly  in  democratic 
societies,  in  producing  extravagant  expenditure  is  not  to  be 
overlooked. 

The  idea  that  '  taxation  is  the  best  form  of  investment ' 
is  placed  by  Bastiat  in  the  same  category  as  the  gross 
fallacy  just  refuted,  but  it  admits  of  a  more  favourable 
interpretation.  If  it  be  said  that  the  taxation  required  for 
the  national  defence,  the  maintenance  of  justice,  and  the 
necessary  functions  of  the  State,  has  been  invested  in  the 
best  manner  and  yields  a  good  return,  the  assertion  is 
substantially  true,  though  perhaps  expressed  in  a  misleading 
way,  as  the  State  cannot  be  regarded  as  a  mere  industrial 
concern.  Further,  as  Leroy  Beaulieu  points  out,  the 
proceeds  of  taxation,  if  employed  in  public  works,  may 
yield  a  satisfactory  return,  and  thus  be  '  a  good  investment ' 
in  the  literal  sense.  The  expediency  of  such  investment 
belongs  rather  to  the  subject  of  expenditure  than  to  that  of 
taxation,  but  we  may  remark  that,  if  public  works  are  likely 
to  be  profitable,  it  seems  better  on  the  whole  to  raise  the 
requisite  funds  by  a  loan  to  be  repaid  through  the  agency  of 
a  sinking  fund.  To  use  taxation  for  this  purpose  is  almost 
equivalent  to  a  '  forced  loan  2.' 

§  3.  The  consideration  of  taxation   as    reproductive  in 

1  Bastiat,  (Euvres,  v.  344  sq. ;  cp.  Leroy  Beaulieu,  i.  118. 

2  Leroy   Beaulieu,    i.    125-6.      See   above,  Bk.   i.   ch.  8.    §§2,  3.      Also 
Bk.  v.  ch.  5,  for  a  discussion    of   the   expediency    of   public  borrowing  for 
this  object. 


CHAP.  II.]      THE   GENERAL    FEATURES   OF  TAXATION.  263 

the  way  of  investment  suggests  the  further*  question  of  the 
possibility  of  its  productiveness  through  reaction  on  the 
national  economy.  If  the  use  of  the  funds  raised  by 
taxation  can  prove  beneficial,  may  not  the  effect  of  taxation 
itself  on  production  be  sometimes  good?  This  view  is 
expressed  in  the  maxim  discussed  by  Hume,  '  that  every 
new  tax  creates  a  new  ability  in  the  subject  to  bear  it,  and 
that  each  increase  of  public  burdens  increases  proportion- 
ably  the  industry  of  the  people,'  which,  he  thinks,  '  must  be 
owned,  when  kept  within  certain  bounds,  to  have  some 
foundation  in  reason  and  experience  V 

Natural  disadvantages  sometimes  stimulate  industry, 
why  then  should  not  artificial  ones  have  the  same  effect  ? 
Economic  progress  has  been  most  remarkable  in  countries 
where  man  has  to  exert  himself  in  consequence  of  the 
parsimony  of  nature,  not  in  the  richest  and  most  fertile 
lands.  A  judicious  use  of  the  engine  of  taxation  would,  it 
might  be  thought,  have  a  similar  effect  on  the  disposition 
of  the  people.  Such  was  the  opinion  of  McCulloch  who 
maintained  that  the  heavy  taxation  of  England,  during  the 
French  wars  (1793-1815)  was  one  of  the  causes  of  the 
growth  of  wealth  at  that  time,  since  it  stimulated  industry 
and  the  spirit  of  enterprise  and  invention  2. 

The  doctrine  in  this  rather  extreme  form  is  open  to  an 
easy  refutation,  for  if  taxes  create  a  new  ability  on  the  part 
of  the  payers  there  can  be  no  determinable  limit  to  their 
useful  employment.  A  wise  government  would  increase 
taxation  indefinitely,  and  thereby  augment  the  national 
possessions.  The  process  of  creating  fresh  wealth  by 
simply  taking  it  from  the  producers  is  so  evidently  im- 
possible that  its  advocates  hesitate  to  carry  their  view  to 
its  logical  outcome.  In  truth  there  is  a  two-fold  fallacy  in 
the  argument.  In  the  first  place  natural  obstacles  do  not, 
in  general,  stimulate  exertion  ;  economic  development  is 

1  Hume, '  Essay  on  Taxes.' 

2  McCulloch,  Taxation  and  Funding,  7  sq. 


264  PUBLIC    FINANCE.  [BOOK  III. 

not  greatest  among  the  Eskimos,  or  the  Fuegians,  as  it 
ought  to  be  on  this  hypothesis.  Some  natural  difficulties 
urge  man  to  action,  but  others  reduce  him  to  torpor,  and 
check  the  first  steps  towards  civilization.  The  influence  of 
natural  disadvantages  in  promoting  the  growth  of  wealth  is 
rather  by  their  indirect  effect  on  the  physical  and  mental 
qualities  of  those  subject  to  them,  not  by  the  economic 
loss  that  they  occasion.  Secondly,  the  analogy  between 
natural  and  artificial  obstacles  is  unsound.  It  does  not 
follow  that  because  men  work  more  strenuously  (and  this 
is  doubtful)  to  till  a  barren  soil,  that,  therefore,  they  will 
exert  themselves  the  harder  the  more  they  suffer  from  the 
incursions  of  marauders.  The  greatest  promoter  of  in- 
dustry is  security,  and  protection  from  arbitrary  taxation 
is  but  one  form  of  that  '  protection  against  the  Govern- 
ment '  on  which  Mill  justly  insists  as  more  important  even 
than  '  protection  by  the  Government  V 

Later  on,  however,  Mill  appears  to,  adopt  a  milder  form 
of  McCulloch's  view.  When  examining  the  effect  of  a  tax 
on  profits,  he  declares  that  *  It  may  operate  in  different 
ways.  The  curtailment  of  profit,  and  the  consequent  increased 
difficulty  in  making  a  fortune,  or  obtaining  a  subsistence  by 
the  employment  of  capital  may  act  as  a  stimulus  to  in- 
ventions, and  to  the  use  of  them  when  made.  .  .  .  Profits 
may  rise  .  .  .  sufficiently  to  make  up  for  all  that  is  taken 
from  them  by  the  tax.  In  that  case  the  tax  will  have  been 
realized  without  loss  to  anyone  2.'  Such  a  result,  though 
possible,  is  extremely  unlikely,  as  the  additional  production 
in  consequence  of  the  tax  would  itself  be  subject  to  taxation. 
A  low  rate  of  profit  may  lead  to  the  introduction  of 
economizing  expedients,  but  the  expectation  of  a  high  rate 
is  far  more  effective  in  increasing  production.  There  is 
just  as  much  and  just  as  little  truth  in  the  belief  that  low 
profits  encourage  industry,  as  in  the  similar  beliefs  that 
low  wages  make  the  workman  and  high  rents  make  the 

1  Principles,  Bk.  i.  ch.  7.  §  6.  2  Ib.  lik.  v.  ch.  3.  §  3. 


CHAP.  II.]      THE   GENERAL   FEATURES   OF   TAXATION.  265 

farmer  industrious  I.  Some  special  examples  have  been 
brought  forward  in  support  of  the  position  that  certain 
forms  of  taxation  stimulate  invention.  McCulloch  cites 
that  of  the  Scotch  distillers,  who,  under  the  influence  of  a 
spirit  duty  assessed  according  to  the  contents  of  the  vessels, 
so  improved  their  processes  by  economy  of  the  time  spent 
in  distilling,  that  instead  of  taking  a  week  they,  in  a  few 
years,  required  only  three  minutes,  and  thereby  were  able 
to  bear  a  duty  nearly  forty  times  as  great  as  at  first. 
Somewhat  similar  improvements  have  been  introduced  into 
the  continental  beet-root  sugar  industry  in  consequence  of 
the  method  of  imposition,  which  assumes  a  certain  yield 
and  charges  duty  only  on  that  amount  leaving  any  excess 
free 2.  In  these  cases  what  is  really  striking  is  the  fact  that 
invention  has  been  stimulated,  not  by  the  duty  but  by  the 
possibility  of  escaping  it :  the  imperfect  form  of  assessment 
has  encouraged  efforts  in  this  direction  that  would  cease  if 
the  true  return  were  brought  under  taxation.  They  do  not 
show  in  the  slightest  that  the  progress  of  invention  in  a 
taxed  industry  is  greater  than  that  in  one  free  from  tax- 
ation. All  antecedent  probability,  and  all  actual  ex- 
perience go  to  prove  the  opposite  3.  One  great  impediment 
to  the  use  of  new  processes  is  the  surveillance  that  taxation 
renders  necessary. 

The  result  of  the  preceding  discussion  is,  briefly,  that 
any  compensating  effect  of  taxation  in  increasing  pro- 
duction is  extremely  doubtful,  and  is  at  best  so  small,  and 
occurs  in  so  few  cases  as  not  to  form  an  element  worthy  of 
entering  into  the  rational  calculations  of  the  financier. 
The  raising  of  compulsory  revenue  means  so  much  loss  to 

1  For  a  good  refutation  of  the  idea  that  low  wages  make  workmen  active 
see  Wealth  of  Nations,  34.  Arthur  Young  approved  of  high  rents  as  promoting 
industry,  Northern  Tour,  ii.  80-83 ;  and  Sir  J.  Caird  deprecates  under-letting, 
but  wisely  remarks  that  the  opposite  error  of  over-letting  is  much  more 
hurtful,  English  Agriculture,  477. 

8  McCulloch,  151-2  ;     Leroy  Beaulieu,  i.  258-260. 

3  For  further  discussion  of  this  point  see  ch.  4  of  the  present  Book,  also 
Bk.  iv.  chs.  6,  7. 


266  PUBLIC    FINANCE.  [BOOK  III. 

the  payers  and  to  the  community  for  which  the  only  return 
obtained  is  the  benefit  resulting  from  the  efficient  execution 
of  state  functions.  Any  doctrine  that  removes  attention 
from  this  cardinal  fact  is  erroneous  in  principle  and  may 
lead  to  serious  practical  evils. 

§  4.  Nor  does  taxation  only  mean  the  withdrawal  of  the 
amount  required  by  the  public  powers  from  the  disposable 
funds  of  the  subjects  of  taxation.  It  may,  and  often  does, 
take  much  more.  In  all  countries  the  cost  of  collection  is 
no  inconsiderable  item,  which  must  be  added  to  the  actual 
amounts  needed  by  the  state  departments,  unless  it  be 
regarded  as  an  additional  state  function.  In  either  view  it 
increases  the  burden  to  the  payers.  Consequently  one  of 
the  most  generally  recognised  maxims  of  Finance  is  that 
which  prescribes  that  '  Every  tax  ought  to  be  so  contrived, 
as  both  to  take  out  and  to  keep  out  of  the  pockets  of  the 
people  as  little  as  possible  over  and  above  what  it  brings 
into  the  public  treasury  of  the  State  V  This  rule,  declared 
by  Wagner2  to  be  simply  the  application  of  the  general 
principle  of  economy  to  Public  Finance,  has  two  distinct 
applications:  (i)  As  regards  the  State  itself,  the  aim  of 
securing  the  best  return  in  amount  of  taxation  for  the 
expense  incurred  in  collection  is  very  plain,  but  even  when 
this  is  realized  there  is  (2)  the  still  more  important  object 
of  not  inflicting  indirect  loss  on  the  subjects,  either  by  the 
obstruction  of  industry  that  taxation  causes,  or  by  the 
inconvenience  that  the  regulations  of  the  system  of  collec- 
tion may  produce.  Some  forms  of  taxation  are  much 
more  oppressive  in  these  respects  than  others,  and  one 
of  the  principal  tasks  of  financial  practice  is  to  discover 
the  least  burdensome  modes, 

The  public  economy  depends  ultimately  on  the  national 
economy;  anything  that  reduces  the  economic  power  of  the 
individual  citizens  is  an  injury  to  the  State.  A  system  of 

1  Wealth  of  Nations,  348.     The  fourth  of  Adam  Smith's  'classical'  rules. 
See  appendix  to  the  present  Book  on  '  The  Maxims  of  Taxation.' 

2  Wagner,  ii.  467.     In  Jevons'  phrase,  '  The  maximisation  of  utility.' 


CHAP.  II.]      THE  GENERAL   FEATURES   OF   TAXATION.  267 

taxation  that  diminishes  the  revenue  of  the  subject  without 
a  corresponding  return  to  the  public  treasury  is  certain 
before  long  to  show  its  effect  in  reduced  receipts  from 
taxation. 

A  comparison  of  English  taxation  as  it  existed  in  1820, 
with  that  now  in  force  proves  how  much  may  be  gained  by 
a  determination  to  conform  to  the  rule  of  '  economy  V  But 
even  in  the  best  existing  systems  of  Finance  there  is  a  large 
amount  of  waste,  some  of  it  unavoidable.  The  raising  of 
such  a  sum  as  .£70,000,000  in  the  course  of  a  year  cannot 
be  accomplished  without  much  interference  with  industry 
and  trade,  and  a  great  deal  of  annoyance  to  individuals. 
From  the  purely  material  point  of  view  the  canon  of 
economy  is  probably  the  most  important  in  Finance,  and 
no  efforts  should  be  spared  to  secure  the  closest  observance 
of  it  that  existing  conditions  permit. 

§  5.  The  supply  of  state  wants  by  taxation  is  then,  it  is 
plain,  a  charge  on  the  collective  resources  of  the  com- 
munity. In  Finance,  as  everywhere  else,  there  is  no  method 
for  obtaining  something  out  of  nothing.  Prudent  manage- 
ment may  make  the  available  resources  go  further  than 
they  otherwise  would.  The  financier,  like  the  mechanician, 
proves  his  ability  by  the  direction  not  by  the  creation  of 
force,  and  especially  by  reducing  to  a  minimum  the  loss 
through  friction.  But  having  decided  that  taxation  is  a 
charge  on  the  national  resources,  there  is  room  for  further 
inquiry  as  to  the  precise  fund  on  which  it  falls.  We  have 
already  mentioned  Adam  Smith's  opinion  that  it  must 
be  derived  from  the  shares  of  revenue.  Ricardo  declares 
that  '  Taxes  are  always  ultimately  paid  either  from  the 
capital  or  from  the  revenue  of  the  country  V  and  expands 
his  statement  by  pointing  out  that  the  proceeds  of  a  tax 
must  curtail  consumption,  increase  production,  or  reduce 
capital,  i.  e.  '  impair  the  fund  allotted  to  productive  con- 

1  See  on  this  Dowell,  ii.  249,  261,  who  quotes  Sydney  Smith's  humorous 
account. 

2  Works  (ed.  McCulloch>,  87. 


268  PUBLIC    FINANCE.  [BOOK  III. 

sumption.'  From  this  he  concludes  that  taxation  should 
be  imposed  on  revenue  rather  than  on  capital,  since  the 
latter  form  of  tax  tends  to  check  future  production.  Some 
writers  have  even  raised  this  into  a  maxim  of  Finance 1. 
The  danger  of  hindering  the  growth  of  capital  is  apparent, 
though  as  capital  is  derived  from  revenue  it  is  not  easy  to 
avoid  taxing  it  to  some  extent.  '  To  provide  that  taxation 
shall  fall  entirely  on  income  and  not  at  all  on  capital  is,'  says 
Mill,  '  beyond  the  power  of  any  system  of  fiscal  arrange- 
ments2. In  actual  economic  life  the  line  between  capital 
and  non-capital  is  not  so  fixed  and  rigid  as  the  text-book 
definitions  would  make  us  believe.  Any  tax  is  certain  to 
take  some  wealth  that  would  otherwise  have  been  devoted 
to  the  aid  of  production,  and  also  some  that,  if  left  to  the 
taxpayers,  would  have  been  consumed  unproductively. 
How  much  will  come  from  each  source  is  not  always  easily 
determinable. 

The  distinction  between  capital  and  revenue  is,  besides, 
not  quite  the  same  when  considered  from  the  national 
instead  of  the  individual  point  of  view.  Much  of  indivi- 
dual capital  is  not  national  capital,  and  this  is  likewise 
true  of  revenue ;  now  for  the  financier  it  is  the  national 
capital  and  revenue  that  need  attention.  Any  pressure  on 
the  most  important  auxiliary  of  production  is  so  far  as 
possible  to  be  avoided  ;  but  where  capital  is  rapidly  in- 
creasing a  tax  that  appears  to  trench  on  individual  capital 
as  e.  g.  the  PZnglish  Death  Duties,  is  not  open  to  the 
objection  of  reducing  national  capital  in  the  same  degree 
as  it  would  be  in  a  poor  and  unprogressive  country.  Taxa- 
tion is  drawn  from  the  total  stock  of  wealth,  including 
at  any  given  time  both  capital  and  revenue.  The  real 
aim  should  be  to  so  direct  it,  as  to  interfere  to  the  smallest 
extent  with  the  action  of  the  forces  that  promote  accu- 
mulation. Heavy  taxation  will  always  be  injurious  in  this 

1  '  Tout  impdt  doit  porter  sur  le  revenu,  et  non  sur  le  capital '  is  the  first  of 
Sismondi's  maxims.     Nouveaux  Prindpes,  Liv.  vi.  ch.  2. 

2  Bk.  v.  ch.  2.  §  7. 


CHAP.  II.]      THE   GENERAL   FEATURES   OF   TAXATION.  269 

respect.  If  imposed  on  revenue  it  reduces  the  fund  from 
which  capital  comes,  and  may  even  lead  to  direct  en- 
croachments oh  individual  capital :  if  on  capital  it  leaves 
revenue  free  to  partially  fill  up  the  gap  that  it  has  made. 
There  is  no  impassable  barrier  between  the  two  categories 
of  wealth  ;  any  action  on  one  must  extend  to  the  other. 

In  addition  to  the  productive  capital  and  annual  new 
production,  all  civilized  societies  possess  a  large  mass  of 
wealth  in  process  of  use,  '  Stock  reserved  for  immediate 
consumption '  as  Adam  Smith  calls  it,  *  consumers'  capital ' 
in  Dr.  Sidgwick's  phrase.  There  is  in  this  *  stock '  a 
further  source  on  which  taxation  may  fall  without  in- 
juriously affecting  the  productive  powers  of  the  com- 
'munity.  In  fact  we  can  fairly  say  that  no  less  compre- 
hensive term  will  suffice  to  describe  the  source  of  taxation 
than  that  already  employed,  viz.  *  the  collective  wealth  ' 
of  the  country.  But  in  actual  societies  in  their  normal 
condition  taxation  is  derived  from  the  national  revenue, 
some  of  which  would  have  been  transformed  into  capital. 
Nothing  but  a  national  crisis  would  justify  taxation  so 
heavy  as  to  absorb  the  free  income  of  the  society  and 
reduce  the  sum  of  its  accumulated  wealth. 

§  6.  A  celebrated  doctrine  has  carried  still  further  this 
limitation,  and  maintained  that  all  taxation  should  be 
levied  on  the  net,  as  opposed  to  the  gross,  income.  The 
net  income  is  asserted  to  be  the  only  disposable  fund  for 
the  purpose.  Gross  income  includes  the  necessary  ex- 
penses of  maintaining  the  citizens,  and  replacing  the  na- 
tional capital.  To  touch  on  that  part  of  the  gross  receipts 
would  be  a  blow  to  the  industrial  organization,  inasmuch 
as  it  is  an  essential  requisite  for  the  society  being  continued 
in  its  full  efficiency  as  '  a  going  concern.'  A  tax  that  takes 
away  a  part  of  the  labourer's  necessary  subsistence,  or  lowers 
profits  below  the  minimum  for  which  men  will  consent  to 
take  the  risk  of  investment  is  indefensible  and  in  the  long 
run  defeats  its  own  object. 

The   earliest    appearance   of  this   doctrine   is  with  the 


270  PUBLIC  FINANCE.  [BOOK  III. 

Physiocrats.  Their  theory  of  the  ' Produit  net'  has  its 
chief  application  in  respect  of  taxation.  The  fifth  of 
Quesnay's  maxims  lays  down  *  that  taxation  should  not 
be  destructive,  or  disproportioned  to  the  sum  of  the  na- 
tional revenue ;  that  its  increase  should  follow  the  in> 
crease  of  revenue ;  that  it  should  be  imposed  immediately 
on  the  net  product  of  land.'  According  to  Du  Pont  de 
Nemours, '  the  portion  of  the  returns  called  the  net  product 
is  the  sole  contributory  to  taxation,  the  only  one  that 
nature  has  prepared  to  meet  it.  It  is  of  the  essence  of 
taxation  to  be  a  part  of  the  net  product  of  cultivation.' 
Mercier  de  la  Riviere  is,  if  possible,  clearer,  'Taxation 
is  nothing  but  a  part  of  a  net  product,  and  can  be  levied 
only  on  a  net  product  V  The  conception  of  the  net ' 
product  as  consisting  of  nothing  but  the  rent  of  land 
appears  to  a  modern  absurd,  but  the  way  in  which  Ques- 
nay  and  his  followers  reached  that  startling  result  is  not 
hard  to  follow.  The  labourer  requires  a  definite  amount 
of  commodities  for  his  subsistence,  more  than  that  he 
will  not  receive,  and  so  much  he  must  get  under  penalty 
of  starvation.  This  '  subsistence  theory '  of  wages  was 
fully  accepted  by  the  Physiocrats2,  and  fairly  accorded 
with  the  fact  in  the  France  of  the  Ancien  Regime.  Pre- 
cisely analogous  is  the  position  of  the  capitalist.  The 
rate  of  interest  is  just  sufficient  to  keep  up  the  existing 
supply  of  capital.  The  interest  on  capital  advanced  is, 
Turgot  tells  us,  '  the  price  and  the  condition  of  that 
advance,  without  which  the  undertaking  could  not  con- 
tinue. If  that  return  is  diminished,  the  capitalist  will 
withdraw  his  money,  and  the  undertaking  will  cease. 
That  return  ought  then  to  be  sacred  and  enjoy  an  entire 
immunity  V 

1  Quesnay  in  Daire,  Physiocrates,  83  ;    Du  Pont,  ib.  351 ;   Mereier  de  la 
Riviere,  ib.  474. 

2  The  often  quoted  passage  of  Turgot,  (£n  tout  genre  de  travail  il  doit 
arriver  et  il  arrive  en  effet  que  le  salaire  de  Vouvrier  se  borne  a  ce  qui  lui  est 
necessaire  pour  lui  procurer  sa  subsistance'  (i.  10),  shows  this. 

3  Turgot,  i.  63. 


CHAP.  II.]      THE   GENERAL   FEATURES   OF   TAXATION.  271 

When  wages  and  profits  are  removed  by  the  nature  of 
things  from  the  tax-collector's  power,  it  goes  without 
saying  that  rent  is  the  only  remaining  source  on  which 
he  can  draw,  and  we  are  compelled,  their  premises  being 
given,  to  accept  the  Physiocratic  conclusion.  Adam  Smith 
declined  to  follow  this  seemingly  rigorous  deduction.  He 
holds  that  both  wages  and  profits  may  contribute  to  taxa- 
tion, though  the  amount  to  be  obtained  from  the  former 
is  very  small.  Ricardo  takes  the  same  view.  While 
asserting  formally  that  it  is  only  from  profits  and  rent 
;  that  any  deduction  can  be  made  for  taxes,'  wages  '  if 
moderate,  constituting  always  the  necessary  expenses  of 
production,'  he  qualifies  his  statement  by  the  admission 
that  labourers  may  receive  more  than  their  necessary 
expenses,  in  which  case  the  surplus  is  a  part  of  '  net  pro- 
duce V  J.  S.  Mill  emphasizes  the  share  of  the  labourers 
in  '  net  produce,1  and  seems  to  desire  to  amend  Ricardo's 
doctrine  on  this  point 2. 

§  7.  The  doctrine  of  net  income  as  the  sole  source  of 
taxation,  whose  history  we  have  just  traced,  has  met  with 
strenuous  opposition  in  Germany.  For  the  last  thirty  years 
the  fact  that  taxation  is  a  duty  incumbent  on  the  citizen 
and  to  be  paid  by  him,  not  by  the  pure  abstraction  called 
'  net  income,'  has  been  loudly  proclaimed.  Hermann's 
theory  of  '  use  capital '  (Nutz-capital]  has  been  employed 
to  show  that  there  is  an  enjoyment  revenue  to  be  added 
to  the  economic  revenue  derived  from  production  in  the 
strict  sense.  '  It  is,'  says.  Cohn,  '  undoubtedly  income  that 
the  owner  of  a  house  enjoys  from  his  residence  in  it,  the 
owner  of  a  park  from  his  enjoyment  of  the  park,  that  a 
third  enjoys  in  his  own  hunting-ground,  in  his  own  picture 
gallery.  It  is  income  in  the  specific  form  of  enjoyment 
of  property3.'  Such  an  extension  would  give  a  larger 
fund  on  which  to  draw,  though  it  seems  preferable  to 
regard  these  forms  of  wealth  in  the  way  adopted  in  a 

1  Works,  210.  2  Principles,  Bk.  i.  ch.  11.  §  i. 

3  §  241. 


272  PUBLIC  FINANCE.  [BOOK  III. 

preceding  section  of  the  present  chapter,  as  property  or 
capital,  and  so  far  liable  in  exceptional  cases  to  taxation. 
J  Of  greater  force  is  the  argument  that  the  cost  of  main- 
taining the  State  is  itself  a  part  of  the  necessary  expenses 
of  the  society.  *  The  protection  of  person  and  property,' 
the  duty  of  the  public  powers  even  in  the  opinion  of  the 
extremest  individualists,  is  almost  as  indispensable  as  feed- 
ing or  clothing.  So  far  then  from  taxation  being  depen- 
dent on  the  surplus  produce  of  the  community  it  may  / 
with  justice  be  looked  on  as  one  of  the  first  charges  on 
the  gross  production,  coming  next  to  that  minimum  of 
food  and  covering  that  is  needed  for  the  preservation 
of  life. 

The  apparent  contradiction  between  two  such  plausible 
opinions  can,  we  believe,  be  escaped  by  taking  a  broader 
view  of  the  subject  than  the  disputants  on  either  side  have 
done.  Necessary  expenses  are  in  no  case  a  fixed  amount. 
Each  standard  demands  a  certain  minimum  outlay,  but  the 
standard  can  be  varied.  The  necessary  subsistence  of  the 
English  labourer  has  always  been  higher  than  that  of  the 
Hindoo.  What  is  true  of  labour  is  equally  true  of  the 
other  factors  of  production.  The  amount  of  capital  can 
be  reduced  to  suit  a  less  intensive  method  of  production, 
and  the  smaller  the  quantity  needed  the  less  caeteris  paribus 
will  be  the  rate  of  interest.  And  so  is  it  also  with  state 
wants.  Their  amount  and  cost  can  and  must  be  adjusted 
to  the  general  position  of  the  society.  The  difficulty  of 
laying  down  any  definite  rule  as  to  the  proportion  of 
national  income,  gross  or  net,  that  ought  to  be  devoted 
to  the  public  service  has  been  shown  at  an  earlier  stage 
of  our  inquiry *.  Here  it  will  suffice  to  distinguish  between 
that  part  of  taxation  that  conduces  directly  or  indirectly 
to  the  production  of  wealth,  and  that  which  produces  non- 
economic  advantages.  The  former  is  beyond  dispute  a  part 
of  the  cost  of  production  ;  without  it  the  amount  of  wealth 
would  be  smaller,  and  the  payment  of  this  part  cannot  be 
1  Bk.  i.  ch.  8.  §  2. 


CHAP.  II.]      THE   GENERAL   FEATURES   OF  TAXATION.  273 

said  to  come  from  the  net  income  or  surplus  after  neces- 
sary expenses  are  met.  The  latter,  like  all  other  forms  of 
enjoyment,  can  be  dispensed  with,  and  yet  leave  the 
amount  of  production  as  great  as  before.  It  may,  there- 
fore, be  said  to  come  out  of  the  net  produce  in  the  wider 
sense  given  to  that  term  by  Mill.  This  separation  is, 
however,  very  hard  to  carry  out.  All  forms  of  public 
expenditure  have  some  effect  in  promoting  industry 1,  and 
some  retrenchment  might  be  made  in  all  without  econo- 
mical loss  to  the  society.  Still  the  principle  of  the  separa- 
tion is  intelligible,  and  within  limits  can  be  usefully  em- 
ployed 2. 

§  8.  Inquiries  respecting  the  derivation  of  the  tax 
revenue  from  gross  or  net  income,  or  from  the  sum  total 
of  the  national  wealth,  may  appear  at  first  a  piece  of 
unnecessary  subtlety.  They  have,  however,  important  prac- 
tical bearings.  Until  the  normal  source  of  taxation  has 
been  determined,  it  is  impossible  to  estimate  the  pressure 
that  it  places  on  a  community.  The  taxable  capacity  of 
India  would  be  very  different,  according  as  the  gross  or  the 
net  revenue  is  taken  as  its  measure  ;  and  in  a  comparison 
between  Great  Britain  and  the  United  States,  the  test  of 
income  would  probably  give  the  first  place  to  the  latter, 
while  that  of  property  would  assign  it  to  the  former 3. 
In  another  important  question  of  Finance  the  problem  of 
the  true  source  of  taxation  becomes  of  moment.  The 
justice  of  any  particular  system  of  taxation  cannot  be 
estimated  without  a  knowledge  of  the  fund  from  which 
the  tax  revenue  is  derived.  According  as  taxation  has 
its  source  in  net  or  in  gross  income  our  view  of  the  equity 
of  existing  systems  must  vary. 

1  Cp.  Bk.  i.  ch.  6.  §  i,  for  the  relation  of  state  expenditure  to  industry  and 
commerce. 

2  On  the  whole  question  cp.  Wagner,  ii.  315  sq.  ;  Cohn,  §  236  sq. ;  Roscher, 
§  35  ;  Held,  Einkommensleuer,  66  sq.     For  Hermann's  theory  of  income  see 
Staatswirthschaftliche  Untersuchungen  (2nd  ed.),  582-598.    Professor  Marshall 
has  developed  Hermann's  view,  Principles  of  Economics,  i.  139  sq. 

3  Giffen,  Growth  of  Capital,  124-139. 

T 


CHAPTER    III. 

THE  DISTRIBUTION  OF  TAXATION. 

§  1.  FROM  an  examination  of  the  general,  and  what  may 
almost  be  called  the  necessary  features  of  the  tax  system, 
conditions  that  are  beyond  the  direct  influence  of  human 
agency,  we  have  now  to  pass  to  a  problem  of  a  very 
different  character,  viz.  the  determination  of  the  proper 
distribution  of  that  burden  inevitable  in  the  levy  of  taxa- 
tion among  the  persons  or  'subjects'  liable  to  it.  Instead 
of  studying  '  what  is,'  we  ask  '  what  ought  to  be.'  The 
distribution  of  taxation  may  be  said  with  far  more  justice 
than  the  distribution  of  wealth  in  general  to  be  '  a  matter 
of  human  institution  solely l '.  Like  all  questions,  into 
which  the  conception  of  '  ought '  or  Tightness  enters,  it  is 
an  ethical  one  ;  but  its  correct  solution  is  so  bound  up  with 
economic  and  financial  considerations,  that  it  must  remain 
within  the  field  of  financial  inquiry.  Without  a  knowledge 
of  the  surrounding  conditions,  and  the  effects  of  any  given 
tax  system,  the  attempt  to  form  a  judgment  respecting  its 
justice  is  hopeless.  Moreover,  the,  at  least  approximately, 
correct  answer  to  the  question  is  of  great  importance  to 
the  practical  financier.  Any  error,  wilful  or  otherwise,  on 
the  subject  is  apt  to  show  itself  in  political  difficulties,  that 
may  in  some  cases  reach  an  acute  point.  Nor  is  it  sufficient 
that  a  tax  system  shall  be  substantially  just :  it  ought  to 

1  J.   S.   Mill,  Principles,   Bk.  ii.  ch.  i.  §  i;    cp.  Marshall,  Principles  of 
Economics,  Bk.  vii.  note  to  ch.  3. 


CHAP.  III.]  THE    DISTRIBUTION   OF   TAXATION.  275 

be  generally  recognised  as  such.  The  prevalence  of  even 
an  unfounded  belief  that  the  public  burdens  are  not  fairly 
divided  among  the  different  classes  and  individual  members 
of  a  society,  is  a  seriously  disturbing  force.  Finance  touches 
on  the  domain  of  general  politics,  and  no  method  of  fiscal 
administration,  however  successful  in  other  respects,  can  be 
worthy  of  approval,  unless  it  seeks,  so  far  as  existing  con- 
ditions allow,  to  realize  the  idea  of  an  equitable  division  of 
the  public  charges. 

The  establishment  of  general  principles  on  this  point  for 
the  guidance  of  financial  policy  and  their  recognition  by 
the  people  in  general,  is,  then,  eminently  desirable,  so  that 
the  investigation  of  the  grounds  on  which  taxation  should 
be  distributed  is  a  work  of  utility  in  the  narrowest  practical 
sense. 

The  difficulties  of  the  inquiry  are  increased  by  several 
distinct  circumstances.  First,  they  are  due  to  the  changing 
nature  of  the  public  economy.  The  city  state  of  Greece  or 
Italy,  the  mediaeval  kingdom  on  a  feudal  basis,  and  the 
nation  of  modern  times,  have  so  many  points  of  contrast, 
their  several  functions  are  in  outward  appearance  so  different, 
that  it  seems  impossible  to  assign  a  single  law  of  distribu- 
tion that  can  include  them  all,  and  yet  be  more  than  a 
truism.  Will  it  not  be  necessary  to  take  each  stage  of 
political  evolution  and  deal  with  it  separately  ?  Next,  even 
confining  our  attention  to  a  single  type  of  State,  it  is  not 
easy  to  bring  the  numerous  public  charges,  and  the  equally 
numerous  functions  whose  cost  they  defray,  to  the  test  of  a 
common  calculation.  It  is  not  clear  on  the  surface  that  all 
citizens  should  bear  all  charges  in  an  equal  degree,  or  that 
all  expenditure  should  fall  on  a  common  and  indivisible 
fund.  The  text-book  writers  have,  it  must  be  said,  created 
a  third  difficulty  that  is  an  illustration  of  the  preceding 
ones.  They,  in  too  many  cases,  have  supplied  us  with 
formulas  that  allow  of  a  convenient  laxity  of  interpretation, 
and  give  an  appearance  of  information  without  the  reality. 

Under  such  circumstances  it  will  be  expedient  to  examine 

T  2, 


276  PUBLIC     FINANCE.  [BOOK  III. 

the  various  rules  of  distribution,  and  to  note  their  historical 
application.  While  thus  engaged  we  shall  see  how  mis- 
understanding has  often  arisen  from  neglect  of  changes  in 
public  economy,  and  of  the  gradual  development  of  the 
State,  as  well  as  from  attempts  to  stretch  a  particular  rule 
beyond  its  legitimate  limits. 

§  2.  The  first  and,  in  one  sense,  the  simplest  principle 
for  the  distribution  of  taxation  is  that  which  would  treat  it 
as  a  payment  for  public  services.  We  have  already  seen 
reason  for  rejecting  this  mode  of  explaining  the  nature  of 
taxation  \  and  thereby  implicitly  its  value  as  a  measure  of 
its  amount.  There  was,  however,  much  in  the  mediaeval 
economic  system  that  tended  to  foster  the  belief.  Private 
economies  admittedly  sold  their  services,  but  the  royal 
economy  was  nothing  but  the  largest  of  private  economies. 
The  King  lived  by  his  domain  and  by  the  fees  that  he 
obtained  for  the  performance  of  duties.  The  whole  feudal 
system  was  based  on  the  idea  of  contract.  Defence  against 
enemies  was  the  payment  for  the  vassal's  homage  and  dues. 
Justice  was  bought,  and  so  were  the  few  economic  services 
rendered  by  the  sovereign.  Under  such  conditions  the 
doctrine  that  taxation  should  be  measured  by  service  sup- 
plied was  but  the  formal  expression  of  an  existing  fact. 
The  growth  of  the  state  economy  made  this  no  longer  true, 
and  the  doctrine  thus  became  a  survival  from  earlier  times. 
It  is  still  more  important  to  note  that  the  method  of  specific 
payment  for  public  services  was  never  a  realization  of 
justice  in  the  distribution  of  burdens.  Neither  in  respect 
to  national  defence,  nor  to  legal  administration,  nor  finally 
to  general  economic  activity,  is  it  possible  to  distribute  the 
advantages  among  individuals,  and  to  charge  in  proportion. 
The  introduction  of  general  taxation  was  in  part  a  result  of 
the  defects  of  the  older  mode,  and  it  was  undoubtedly  a 
step  in  advance,  particularly  in  the  direction  of  securing  a 
fairer  allocation  of  the  expenses  of  the  public  powers. 

The  theory  that   taxation   is  the   price  of  the    State's 

1  Bk.  iii.  ch.  i.  §  4. 


CHAP.  III.]  THE    DISTRIBUTION   OF   TAXATION.  277 

services,  and  finds  its  measure  for  each  citizen  in  the 
amount  of  benefit  received  is,  as  regards  the  latter  part, 
quite  unsupported  by  history.  The  system  of  direct  pur- 
chase applied  to  the  State's  tasks  was  so  far  from  being 
equitable,  that  justice  was  only  made  possible  by  its 
abandonment. 

The  plausibility  of  this  view  of  the  measure  of  taxation 
arises  from  the  apparent  support  that  it  gives  to  the  indi- 
vidualistic theory  of  the  State.  If  the  services  of  govern- 
ment are  the  standard  by  which  to  regulate  taxation,  there 
appears  to  be  no  essential  difference  between  the  payment 
of  taxes  and  the  purchase  of  commodities.  The  assimila- 
tion of  the  two  forms  is  in  reality  a  forced  one.  In  the 
case  of  taxation  the  advantage  given  is  indefinite,  and  the 
payment  for  it  is  compulsory  ;  the  modern  upholders  of 
the  doctrine  are  consequently  forced  to  have  recourse  to 
some  other  standard,  which,  they  declare,  brings  about  a 
substantial  equality  between  the  benefits  received  and  the  /> 
taxes  paid 1.  That  usually  suggested  is  the  rule  of  taxation  \r 
in  proportion  to  revenue.  It  is,  however,  quite  impossible 
to  establish  any  such  connexion.  Limiting  state  functions 
to  the  minimum,  viz.  the  protection  of  person  and  property, 
there  can  be  no  doubt  that  the  former  would  in  general 
require  equal  payment  from  all.  It  costs  quite  as  much. 
'  perhaps  on  the  whole  more,'  to  protect  a  poor  man's  person 
as  it  does  to  perform  the  same  service  for  a  rich  man. 
Again,  as  regards  property,  there  is  little  ground  for  the 
belief  that  the  cost  of  guarding  it  varies  directly  as  its  value. 
If  security  is  to  be  sold  like  tea  or  sugar,  there  ought  on 
the  strictest  commercial  principles  to  be  some  allowance 
made  to  the  purchaser  of  a  large  quantity !  The  natural 
conclusion  therefore  appears  to  be  that  the  rate  of  taxation 
should,  on  the  theory  of  purchase  and  sale,  be  lower  on 
large  than  on  small  incomes ;  but  even  this  result  does  not 
rest  on  very  solid  ground  since  any  change  in  the  quality 

1  For  a  statement  of  this  theory  see  Thiers,  De  la  Propriete,  348,  who  compares 
taxation  to  an  insurance  premium. 


278  PUBLIC     FINANCE.  [BOOK  III. 

or  quantity  of  state  services  would  alter  the  relations  of  the 
parties  concerned. 

§  3.  The  evident  weakness  of  the  theory  just  discussed, 
makes  the  adoption  of  some  other  and  more  precise  criterion 
necessary.  Retaining  the  idea  that  taxation  should  be 
equal,  but  giving  up  as  hopeless  the  attempt  to  measure 
the  respective  services  performed  for  each  person  by  the 
State,  we  might  conceivably  abandon  all  efforts  at  differen- 
tiation between  individuals,  and  hold  that  equality  was 
realized  by  taxing  all  persons  (or  all  families)  at  the  same 
rate.  Such  a  method  might  be  admissible  in  a  primitive 
community.  All  are  dependent  on  the  State  for  certain 
essential  conditions  of  social  life.  Why  should  not  all  pay 
equally  for  these  advantages  ?  Military  service  is  rendered 
by  all  alike,  and  the  same  principle  might  seem  as  applic- 
able to  the  contribution  of  commodities  as  to  that  of 
services.  Civilized  societies  have,  however,  almost  for- 
gotten the  existence  of  a  state  of  things  in  which  such  an 
arrangement  would  be  feasible.  The  annual  tax  revenue 
of  the  United  Kingdom  may  be  put  roughly  at  £75,000,000, 
and  the  population  at  37,500,000.  Under  a  system  of 
equal  contribution  the  rate  per  head  would  be  £2,  or  £10 
for  a  family  of  five.  The  labourer's  family,  with  a  weekly 
income  of  £iy  would  be  taxed  about  20  per  cent.  ;  a  middle 
class  family,  with  £500  per  annum,  would  be  taxed  z  per 
cent. ;  where  the  family  income  was  £50,000  per  annum  the 
charge  would  be  an  insignificant  fraction.  The  method  of 
equal  contributions  per  head  would  be  impossible  politically, 
besides  being  extremely  unjust. 

Dismissing  then  the  idea  of  equal  taxation  of  persons  as 
utterly  impracticable,  we  come  to  what  is  the  best  known 
and  most  widely  accepted  doctrine,  viz.  that  which  takes 
'faculty'  or  'ability'  as  the  measure  for  taxation.  This 
view,  which  is  found  as  early  as  Bodin  3,  has  been  em- 

1  '  Sunt  igitur  ea  vectigalia  .  .  .  probanda  quae  in  omnes  ordines  pro  singu- 
lorum  facultatibus  exaequantur,'  Bodin,  De  Rep.  Liv.  vi.  ch.  2.  See  Neu- 
mann, 'Die  Steuer  nach  Steuerfahigkeit/  in  Conrad's /a^r£.  1880,  for  a  history 
of  the  doctrine. 


CHAP.  III.]  THE   DISTRIBUTION   OF   TAXATION.  279 

bodied  by  Adam  Smith  in  the  first  of  his  classical  maxims  ; 
'  The  subjects  of  every  State  ought  to  contribute  towards 
the  support  of  the  government,  as  nearly  as  possible,  in 
proportion  to  their  respective  abilities  V  For  the  last 
twenty  years  it  has  been  the  doctrine  accepted  by  the 
majority  of  German  financiers.  One  reason  for  the  readi- 
ness with  which  '  ability '  has  been  adopted  as  the  measure 
of  taxation,  is  perhaps  its  convenient  vagueness.  The  mere 
statement  that  taxation  should  be  proportioned  to  '  ability,' 
does  not  afford  much  practical  guidance.  A  measure  of 
'  ability '  is  further  wanted,  and  in  fact  different  criteria 
have  been  put  forward  with  equal  sincerity  and  equal  con- 
fidence. Property,  revenue,  net  revenue,  have  each  been 
selected  as  the  test  of  the  tax-payer's  ability. 

All  of  these  are  more  or  less  measurable,  and  present,  so 
to  speak,  objective  standards,  but  the  measure  of  '  ability  ' 
has  sometimes  been  transformed  into  that  of  'sacrifice,' 
and  this  test  has  been  widely  approved  of.  '  Equality  of 
taxation,'  says  Mill, '  as  a  maxim  of  politics  means  equality 
of  sacrifice2.'  It  is  apparent  that  the  rule  of  equality  of 
sacrifice  is  but  another  mode  of  stating  the  rule  of  equality 
as  to  ability.  Equal  ability  implies  equal  capacity  for 
bearing  sacrifice.  An  equal  charge  will  impose  equal 
sacrifice  on  persons  of  equal  '  faculty,'  and  where  abilities 
are  unequal  a  corresponding  inequality  in  the  amount  of 
taxation  will  realize  the  aim  of  equality  of  sacrifice.  There 
is,  however,  a  shade  of  difference  in  -the  two  terms.  Ability 
suggests  the  positive  element  of  power  to  contribute ; 
sacrifice  the  negative  one  of  loss  by  contribution :  the 
former  is  most  naturally  measured  by  some  objective 
standard ;  the  latter  refers  primarily  to  the  sentiments 
of  the  people  concerned,  and  is,  therefore,  rather  sub- 
jective. The  use  of  sacrifice  incurred  as  the  measure  of 
taxation  is  probably  due  to  a  disposition  to  place  weight 
on  the  element  of  privation  felt  by  those  who  are  taxed, 

1  Wealth  of  Nations,  347  ;  cp.  342.     See  Appendix. 

2  Principles,  Bk.  v.  ch.  2.  §  2. 


280  PUBLIC    FINANCE.  [BOOK  III. 

instead    of    the    external    marks    that    evidence    ability 
to  pay. 

But  whether  'ability'  or  'sacrifice'  be  taken  as  the 
standard,  it  is  possible  to  reach  very  different  practical  re- 
sults according  to  the  amount  of  weight  assigned  to  the 
different  elements.  We  accordingly  meet  with  three  differ- 
ent forms  of  distribution,  all  avowedly  based  on  the  criterion 
of  ability,  and  all  claiming  to  realize  true  equality.  These 
are :  (i)  pure  proportional  taxation,  in  which  income  is 
taken  as  the  standard,  and  the  amount  of  public  burdens 
regulated  by  it ;  (2)  qualified  proportional  taxation,  where 
income  is  still  the  test,  but  is  subjected  to  certain  modifica- 
tions, either  by  deduction  of  necessary  expenses  or  by 
analysis  of  its  component  parts ;  (3)  '  progressive '  or 
graduated  taxation,  which  places  a  heavier  rate  of  charge 
on  large  than  on  small  incomes  since  the  ability  of  the 
'  subject '  is  supposed  to  increase  in  a  more  rapid  ratio  than 
the  increase  of  his  income. 

§  4.  The  rule  of  proportional  taxation  has  been  un- 
doubtedly the  doctrine  of  the  classical  political  economy. 
Connected  on  its  political  side  with  the  liberalizing  move- 
ments of  the  1 8th  century,  its  representatives  protested 
against  all  exemptions  and  privileges,  and  against  none 
more  than  those  granted  in  respect  of  taxation.  The  asser- 
tion of  the  justice  of  taxing  in  proportion  to  revenue  carried 
with  it  a  condemnation  of  the  very  common  freedom  from 
all  personal  taxation  enjoyed  by  the  privileged  classes  of 
the  Continent.  *  There  is,'  says  Vauban, '  a  natural  obliga- 
tion on  the  subjects  of  all  conditions  to  contribute  in 
proportion  to  their  revenue  or  their  industry.  .  .  Every 
privilege  that  tends  to  exemption  from  that  contribution  is 
unjust  and  abusive  V  If  taxation  should  be  proportional 
it  follows  necessarily  that  it  must  also  be  general.  The 
French  Revolution,  and  the  changes  that  it  led  to  else- 
where, so  completely  abolished  the  objectionable  privileges 
that  this  side  of  the  doctrine  is  often  ignored,  and  its  refer- 

1  Dime  Royale  (ed.  Daire),  48  ;  cp.  Meyer,  Principien,  §  2. 


CHAP.  III.J  THE   DISTRIBUTION    OF   TAXATION.  281 

ence  to  the  income  possessed  alone  considered.  Adam 
Smith  completes  his  statement  that  taxation  should  be 
adjusted  to  the  abilities  of  the  subjects  by  adding  'that  is 
in  proportion  to  the  revenue  which  they  respectively  enjoy 
under  the  protection  of  the  State  V  And  since  his  time 
the  rule  has  been  quoted  and  adopted  by  most  of  his  Eng- 
lish and  French  successors 2.  At  first  put  forward  as  a 
protest  against  the  injustice  of  the  old  system  of  privilege, 
the  maxim  of  proportional  taxation  is  now  employed  as  a 
weapon  against  the  newer  Radical  socialism  3. 

One  great  advantage  of  the  rule  is  its  simplicity.  As 
M.  Say  puts  it,  '  Proportional  taxation  does  not  need  de- 
finition, it  is  the  rule  of  three.  .  .  When  it  is  said  of  a  tax 
that  it  will  be  levied  proportionally  every  one  understands 
it4.'  The  problem  of  taxation  is  reduced  to  its  least  com- 
plex form.  Given  the  amount  that  must  be  raised  by 
taxation,  and  given  the  sum  of  individual  incomes,  the 
rate  per  cent,  can  be  assigned,  and  applied  to  each  case. 
It  is  true  that  there  are  certain  practical  difficulties  in  the 
way.  The  ascertainment  of  individual  incomes  is  not  a 
perfectly  easy  work,  and  where,  as  is  almost  universally  the 
case,  it  is  necessary  to  specialize  the  tax  system  and  have 
a  number  of  duly  arranged  charges,  it  is  difficult  to 
measure  the  exact  amount  paid  by  each  citizen  to  the 
public  treasury.  But  any  other  principle  must  either  meet 
or  evade  these  embarrassments  besides  those  that  are 
peculiar  to  itself.  Simplicity  and  easy  application,  though 
desirable  in  Finance,  are  not  the  sole  objects  to  be  attained, 
and,  therefore,  the  rule  of  proportional  taxation  has  been 
vehemently  opposed  as  failing  to  give  a  just  distribution  of 
the  public  charges.  The  question  has,  in  fact,  been  mainly 


1  Wealth  of  Actions,  347. 

2  '  Nous  favons  adoptee  et  nous  devons  la  defendre?  is  the  expression  of  Leroy 
Beaulieu,  i.  139. 

3  See  for  a  full  exposition  of  this  point  of  view  Leon  Say,  Les  Solutions  demo- 
cratiques  de  la  Qztestion  des  Impdts. 


282  PUBLIC    FINANCE.  [BOOK  III. 

debated  on  the  issue  whether  proportional  or  progressive 
taxation  should  be  the  system  adopted. 

§  5.  What  is  known  to  continental  writers  as  progressive 
—but  more  familiar  in  England  as  graduated — taxation 
includes,  as  we  have  said,  any  system  in  which  the  rate  of 
taxation  becomes  higher,  or  progresses  as  income  increases. 
In  this  consists  the  essence  of  the  principle  ;  the  grades  into 
which  incomes  are  divided,  the  initial  rate  of  charge,  and 
the  increases  at  the  several  stages  of  advance,  though  very 
important,  are  yet  matters  of  application. 

The  reasons  that  have  led  to  the  popularity  of  progres- 
sive taxation  are  obvious  enough.  The  loss  of  a  portion  of 
wealth  by  a  rich  man  is  generally  regarded  as  a  very  slight 
evil  or  as  none  at  all ;  while  to  a  poor  one  it  causes  curtail- 
ment of  real  enjoyment.  The  deduction  of  £10  from  an 
income  of  £100  will  in  most  cases  prove  a  serious  pressure, 
sweeping  away  perhaps  the  savings  of  the  period,  or  com- 
pelling the  sacrifice  of  all  relaxation,  that  of  £100  from 
;£i,ooo,  though  still  heavy,  would  not  trench  upon  the  con- 
ditions of  a  comfortable  life.  ;£j,oco  taken  from  £10,000 
would  leave  a  balance  sufficient  to  support  a  luxurious 
existence,  and  £10,000  from  .£100,000  would  hardly,  so 
popular  sentiment  imagines,  be  perceptible  by  the  owner. 
Yet  it  is  precisely  these  deductions  that  proportional  taxa- 
tion carries  out,  without  recognition  of  the  real  gradations  of 
ability  and  capacity  for  bearing  sacrifices.  So  regarded,  the 
levying  of  equal  rates  on  all  incomes  has  an  appearance  of 
unfairness  that  has  given  much  support  to  the  plan  of 
graduating  charges  according  to  different  scales. 

Though  the  general  current  of  economic  opinion  has  till 
recently  been  decidedly  against  the  idea  of  progression,  the 
system  has  secured  the  adhesion  of  some  eminent  authorities. 
A  passage  of  Montesquieu's  has  been  often  quoted  in  its 
favour,  in  which,  speaking  of  the  Athenian  property  tax,  he 
says,  *  it  was  just  though  not  proportional ;  if  it  did  not  follow 
the  proportion  of  goods,  it  followed  the  proportion  of  wants. 
It  was  thought  that  each  had  equal  physical  necessities, 


CHAP.  III.]  THE    DISTRIBUTION   OF   TAXATION.  283 

which  ought  not  to  be  taxed  ;  that  what  was  useful  came 
next  and  should  be  taxed,  but  not  so  highly  as  super- 
fluities V  Rousseau  and  the  elder  Mirabeau  took  the  same 
view.  In  the  present  century  J.  B.  Say  and  Joseph 
Gamier  have  approved  of  a  system  of  moderate  progres- 
sion. The  former  *  did  not  fear  to  declare  that  progressive 
taxation  was  the  only  equitable  form '  ;  the  latter  held  that 
taxation  ought  to  be  progressive  without  spoliation^2.' 
Still  the  weight  of  authority  was  on  the  other  side.  '  Pro- 
gressive taxation/  like  *  protection '  or  '  a  double  standard,' 
was  an  heretical  tenet  opposed  to  the  true  economic  faith. 
Alike  in  England,  France,  and  Germany,  it  was  rejected  by 
such  representatives  of  competent  opinion  as  J.  S.  Mill 
and  McCulloch,  Levasseur  and  De  Parieu,  Gneist  and 
Hermann  3. 

The  recent  change  in  opinion  on  this  subject  has  been 
due  partly  to  increased  popular  influence  over  government. 
The  shifting  in  the  centre  of  political  gravity  that  the 
growth  of  democracy  has  brought  about  has,  as  one  of  its 
consequences,  a  tendency  to  alter  the  distribution  of  taxa- 
tion in  favour  of  the  most  powerful  classes,  i.e.  the 
numerical  majority.  This  can  only  be  accomplished  by 
putting  a  heavier  burden  on  the  wealthy.  The  diffusion 
of  socialistic  ideas  assists  in  this  movement.  Progressive 
taxation  is  one  of  those  agencies  that  seem  likely  to 
facilitate  the  transition  from  the  capitalist  to  the  socialist 
regime,  and  it  consequently  has  the  support  of  the  various 
sections  of  that  party.  Among  the  counts  of  the  indict- 
ment that  the  French  economists  bring  against  the  system 
one  of  the  weightiest  in  their  view  is  its  socialistic  character. 

Modern  developments  of  economic  theory  have  also  had 

1  Esprit  des  Lois,  Liv.  xiii.  ch.  7. 

2  Gamier  calls  his  system  '  progressional ' ;  see  J.  B.  Say,  Traite,  Bk.  iii.  ch.  9  ; 
Gamier,  Traite  des  Finances,  68. 

"  '  This  doctrine  seems  to  me  too  disputable  altogether,  and  even  if  true  at  all, 
not  true  to  a  sufficient  extent  to  be  made  the  foundation  of  any  rule  of  taxation,' 
Mill,  Principles,  Bk.  v.  ch.  2.  §  2  ;  cp.  McCulloch,  Taxation,  65 ;  De  Parieu,  i. 
38  ;  Levasseur,  Precis ;  343;  also  Neumann,  Progressive  Einkotnmensteuer,  112. 


284  PUBLIC  FINANCE.  [BOOK  III. 

their  share  in  the  work.  The  members  of  the  '  historical ' 
school  have  not  been  bound  by  any  undue  respect  to  th9 
opinions  of  their  predecessors,  and  their  greater  sympathy 
with  semi-socialist  ideas  made  them  inclined  to  favour  what 
seemed  to  be  a  mode  of  relieving  the  poorer  classes  from 
the  pressure  of  excessive  taxation.  Some  moderate  form 
of  progression  has  generally  been  approved  of  by  them. 

Another  and  apparently  opposed  school  has  tended  in 
the  same  direction.  The  more  accurate  study  of  the  varia- 
tions of  utility  which  forms  the  common  starting  point  of 
the  researches  of  Jevons,  Menger,  and  Walras,  has  among 
its  other  important  effects  given  a  new  mode  of  measuring 
the  pressure  of  taxation.  The  final  utility  becomes  the 
measure  of  sacrifice,  and  if,  as  is  plain,  is.  is  more  to  the 
possessor  of  an  income  of  £100  than  it  is  to  one  of  £1,000,  it 
does  not  follow  that  it  is  exactly  ten  times  as  great.  The 
assumption  that  equal  percentages  of  income  are  of  equal 
utility  is  a  rough  '  first  approximation  '  admissible,  perhaps, 
in  the  earlier  stages  of  inquiry,  but  certain  to  give  place  to 
the  more  accurate  results  of  later  investigation.  It  is 
noticeable  that  Sax  and  Wieser,  who  represent  the  financial 
studies  of  the  Austrian  school,  have  both  declared  for 
progressive  taxation  1. 

§  6.  A  system  of  progression  may  be  realized  in  different 
ways  as,  e.  g.  by  heavy  taxes  on  luxuries  consumed  by  the 
rich 2,  or  higher  duties  on  the  finer  kinds  of  all  commodities. 
The  taxation  of  inheritances,  and  duties  on  the  transfer  of 
property,  as  also  on  commercial  transactions  generally, 
could  be  so  adjusted  as  to  reach  the  same  end,  but  the 
mode  usually  employed  is  that  of  progressive  income  and 
property  taxes.  This  is  obviously  the  most  direct  way, 
since  it  places  the  increased  charges  at  once  on  the  larger 
incomes,  and  has  not  to  trust  to  the  less  certain  and  calcul- 
able operations  of  taxes  on  '  consumption '  or  on  '  acts.' 
In  form  the  tax  may  be  on  property,  or  on  income,  or  on 

1  Sax,  Staatswirthschaft,  508-513  ;  Wieser,  Natiirlicher  Werth,  229. 

2  The  English  assessed  taxes  might  have  been  thus  employed. 


CHAP.  III.]  THE    DISTRIBUTION   OF  TAXATION.  285 

both  ;  but,  as  in  any  case,  it  must  normally  be  paid  out  of 
income,  the  assessment  on  property  is  simply  a  particular 
mode  of  fixing  the  rate  of  charge. 

Whatever  be  the  form,  the  policy  of  progressive  taxation 
is  open  to  serious  objections,  of  which  the  following  may  be 
noticed  as  the  most  important. 

(i)  Progressive  taxation  is  entirely  arbitrary,  ^he 
possible  scales  are  infinite  in  number,  and  no  simple  and 
intelligible  reason  can  be  assigned  for  the  selection  of  one 
in  preference  to  its  competitors.  The  statement  of  some 
suggested  scales  will  illustrate  the  truth  of  this  remark. 

Professor  F.  W.  Newman  has  proposed  the  following 
system  of  progression.  Incomes  under  £100  to  be  free  ; 
those  between  £100  and  £1,000  to  pay  3  per  cent,  on  the 
excess  over  £100  ;  those  between  £1,000  and  £2,000  to 
pay  4  per  cent,  on  the  excess  over  £1,000  ;  those  between 
£2,000  and  £3,000  to  pay  5  per  cent,  on  the  excess  over 
incomes  in  the  preceding  class  and  so  on,  the  rate  increasing 
i  per  cent,  for  each  additional  £1,000.  This  scale  at 
first  sight  seems  moderate  enough :  an  income  of  £600 
would  pay  only  £15  (i.e.  3  per  cent,  on  £500)  or  i\  per 
cent. ;  one  of  £1,700  would  have  to  pay  £55  (i.  e.  3  per 
cent,  on  £900  and  4  per  cent,  on  £700)  or  less  than  3^  per 
cent.  When,  however,  the  higher  incomes  are  considered, 
its  aspect  is  changed.  In  an  income  of  £97,000  the  last 
£1,000  would  be  taxed  99  per  cent.,  leaving  but  £10  to  the 
possessor,  and  any  higher  amount  would  be  altogether  ab- 
sorbed. Therefore,  the  maximum  income  possible  would 
be  £47,533 1> 

1  The  following  calculation  shows  this : — In  an  income  of  £97,000  the  first 
£100  is  free  ;  the  next  £900  will  be  taxed  at  3  per  cent,  or  £27,  leaving  a 
balance  of  £973  out  of  the  £1000  ;  of  the  second  £1000,  taxed  at  4  per  cent., 
the  owner  will  have  ^£960  ;  of  the  third,  ^950  ;  and  so  on,  decreasing  by  £10 
for  each  additional  £1000.  The  maximum  income  will  therefore  be  .£973  plus 
the  sum  of  the  series 

(10+20  +  30  +  40 960)  =  973  + 10  (i  .  2  .  3 . 4 96) : 

973  +  I0    -      ^    =  973  +  46560  -  47533- 


286  PUBLIC    FINANCE.  [BOOK  III. 

Again,  take  that  mentioned  by  M.  Leroy  Beaulieu,  in 
which  the  tax  triples  as  the  revenue  doubles,  the  rate  at 
starting  being  i  per  cent.,  and  the  lowest  grade  up  to  500 
francs.  This  will  work  out  as  shown  in  the  following 
table1:- 

Income  in  Francs.  Amount  of  Tax.  Rate  per  cent. 

500  5  4                           i 

1,000  15                             1-50 

2,000  45                            2-25 

4,000  135                            3.375 

8,000  405                            5-06 

16,000  1,215                          7-6 

32,000  3,645  1 1. 4 

64,000  10,935  17-1 

128,000  325805  25-6 

256,000  98,4!  5  38-4 

512,000  295,245  57-6 

1,024,000  885,735  86-5 

2,048,000  2,657,205  129.7 

In  both  cases,  after  a  certain  point  is  reached,  the  total 
additional  revenue  is  taken  by  the  tax-collector,  and  at  a 
much  lower  one  the  rate  becomes  oppressively  high.  Actual 
examples  of  progression  are,  as  will  appear,  much  milder. 
The  highest  rate  of  charge  is  fixed  at  a  comparatively  low 
percentage.  The  fact,  however,  remains  that  there  is  no 
self-acting  principle  by  which  to  determine  the  scale  of 
progression.  We  must  perforce  agree  with  M.  Say  when 
he  declares  that  '  progression  is  naturally  arbitrary  2.'  Op- 
ponents of  the  system  will  naturally  hold  that  the  most 
moderate  form  is  the  least  evil,  and  try  to  attain  that  result 
(unless  they  prefer  to  have  an  extreme  measure  in  the  hope 
that  its  hardships  may  cause  a  reaction).  Reasonable  sup- 
porters will  recognise  that  a  rapidly  increasing  rate  is  both 
unjust  and  economically  injurious.  But  beyond  such  vague 

1  Leroy  Beaulieu,  i.  148-150. 

2  Impdts  Democratiques,  i.  172.     It  may  be  suggested  that  the  scale  that 
would  give  the  maximum  revenue  should  be  chosen,  but  this  is  (a)  extremely 
difficult  to  determine,  and  (b)  is  not  consistent  with  the  aim  of  proportional 
sacrifice.     It  is  besides  quite  possible  that  several  different  scales  should  satisfy 
the  condition. 


CHAP.  III.]  THE    DISTRIBUTION    OF   TAXATION.  287 

propositions  nothing  can  be  stated.  All  depends  on  the 
will  of  the  Legislature,  i.  e.  in  most  modern  societies  on  the 
votes  of  persons  who  will  not  directly  feel  the  charges 
placed  on  the  higher  incomes,  and  will  probably  believe 
that  they  will  be  gainers  by  them. 

(2)  A  serious  obstacle  is   the  danger  of  evasion.    \No 
empirical  law  is  better  established  in  Finance  than  that 
which  states  that  high  taxation  leads  to  efforts  to  avoid  it. 
Duties  on  luxuries  are  in  part  escaped  by  the  smuggler's 
aid ;  special  duties  on  the  better  kinds  of  goods  lead  to 
false  declarations  ;  progressive  income  and  property  taxes 
cause  false  returns  on  the  part  of  the  contributors.     For 
this  latter  fact  there  are  several  reasons.     The  increased 
charge  on  higher  incomes  offers  a  special  inducement  to 
understatement  on  the  part  of  those  liable,  as  thereby  they 
obtain  a  lower  rate,  a  proceeding  the  more  readily  excused 
to  their  consciences  by  the  plea  that  the  exaction  escaped 
is  itself  unjust.     Another  reason  is  the  impossibility  of  em- 
ploying effective  measures  for  collection.     With  a  uniform 
income  tax  a  great  deal  of  income  can  be  taken  at  its 
source  where  evasion  is   impossible ;  with  progression,  as 
the  rate  varies  according  to  the  sum  of  income,  the  ascer- 
tainment of  that  fact   is  required    for  fixing  the  charge, 
though  it  is   undoubtedly  very  difficult  to  get  a  proper 
answer  to  inquiries   respecting  it.      Thus  the  motives  for 
evasion  would  be  stronger,  and  the  means    of  prevention 
less  effective  in  the  case  of  a  progressive  than  of  a  propor- 
tional tax.    It  is  the  intrusion  of  the  personal  and  arbitrary 
element    that   raises   this   difficulty   which   is   accordingly 
unavoidable. 

(3)  A  powerful  argument  against  progressive  taxation  is 
derived  from  its  probable  effect  on  the  accumulation  of 
wealth.     One  of  the  motives  to  providence  is  the  desire  of 
gaining  a  large  fortune,  but  a  system  that  in  its  extreme 
forms  prevents,  and  in  any  case  hinders  the  attainment  of 
this  desire  must,  it  is  argued,  check  the  growth  of  capital. 
The  imposition  of  special  taxation  on  the  larger  incomes  is, 


288  PUBLIC    FINANCE.  [BOOK  III. 

in  fact,  a  fine  on  saving,  and  consequently  an  impediment 
to  the  supply  of  one  of  the  auxiliaries  of  production.  If 
the  legislator  is  to  interfere  at  all  he  ought  rather  to 
encourage  the  formation  of  new  stores  of  wealth  that  will, 
in  the  vast  majority  of  cases,  be  used  to  assist  industry. 

The  discouragement  to  capital  may  operate  in  two 
different  ways.  There  will  naturally  be  a  movement  of 
wealthy  persons  from  a  district  in  which  they  are  subjected 
to  special  penalties.  Any  existing  outflow  of  wealth  will 
be  increased  and  the  influx  of  other  wealth  so  far  checked. 
Such  is  a  very  probable  and  serious  danger  in  a  small 
district  from  which  movement  is  easy,  and  with  the  modern 
tendency  to  an  international  movement  of  capital  it  may 
occur  even  in  large  areas.  But  for  countries  with  a  highly 
developed  system  of  industries,  another  effect  is  more  to 
be  dreaded,  viz.  the  stoppage  of  saving  at  an  earlier  period. 
Capital  may  not  emigrate  readily  from  such  a  country  as 
England  or  France,  but  the  annual  increment  may  become 
smaller  and  finally  cease.  Considering  the  dependence  of 
industry  on  the  facilities  for  obtaining  new  capital  it  would 
seem  that  any  artificial  check  to  its  growth  would  be  a 
grave  evil  and  likely  to  react  on  the  Finances  of  the  State. 

In  mitigation  it  may  be  urged  that  progressive  taxation 
is  not  in  fact  likely  to  weaken  the  disposition  to  save.  It 
will  only  affect  those  who  possess  a  good  deal  already,  and 
such  persons  save  as  much  from  habit  as  from  conscious 
motive.  There  is,  too,  the  further  fact  that  the  heavier 
taxation  on  the  rich  will  leave  the  poor  a  larger  disposable 
sum,  part  of  which  they  may  save,  and  to  that  extent 
increase  the  store  of  wealth.  But,  though  in  both  those 
ways,  the  loss  to  capital  under  a  moderate  progression  may 
be  reduced,  it  seems  clear  that  some  loss  there  will  in- 
evitably be,  and  it  is  incumbent  on  the  supporters  of  any 
measure  tending  in  this  direction  to  show  what  compensa- 
tion will  be  gained  through  fairer  distribution. 

(4)  The  productiveness  of  a  progressive  tax  on  incomes 
is  not  as  great  as  is  popularly  supposed.  This  failure  to 


CHAP.  III.]  THE   DISTRIBUTION   OF  TAXATION.  289 

reach  expectation  is  due  partly  to  the  evasions  that  have 
been  noticed  as  incident  to  the  tax,  and  also  to  the  various 
devices  not  absolutely  illegal  that  are  used  to  escape  the 
extra  pressure.  If  vigorously  collected  the  tax  causes  much 
capital  to  emigrate,  discretion  is  therefore  very  often  em- 
ployed in  enforcing  claims,  and  in  either  case  the  revenue 
suffers.  Another  reason  is  found  in  the  fact  that  in  most 
countries  large  incomes  do  not  form  a  large  proportion  of 
national  revenue.  Taxation,  to  be  productive,  must  draw  on 
the  resources  of  the  middle  and  working  classes.  The  unpro- 
ductiveness of  progressive  direct  taxes  is  paralleled  by  the 
small  yield  of  taxes  on  the  luxuries  of  the  rich  as  compared 
with  duties  on  articles  of  general  consumption  l.  To  obtain 
the  funds  needed  by  the  State  pressure  must  be  placed  on 
all  classes  of  society,  not  merely  on  the  well-to-do. 

§  7.  The  foregoing  objections,  which  may  be  distinguished 
in  their  order  as  political,  moral,  economical,  and  fiscal,  are 
so  weighty  that  nothing  but  a  very  clear  proof  of  injustice 
inflicted  by  any  other  system  than  progression  would  per- 
mit its  use.  The  injustice  of  proportional  or  regressive ] 
taxation,  if  established,  goes  to  show  that  for  the  realization 
of  equity  progression  in  some  form  must  be  adopted.  In 
support  of  this  contention,  we  have  nothing  but  the  appeal 
to  equality  of  sacrifice  as  the  standard,  and  the  alleged 
failure  to  conform  to  it  by  taking  equal  proportions  from 
different  incomes.  The  deduction  of  ,£10  from  A's  income 
of  £100,  and  of  ;£  1 0,000  from  B's  of  ^"100,000  will,  it  is 
maintained,  inflict  greater  suffering  on  A  than  on  B.  Such 
is  the  assumption  of  the  upholders  of  progression,  and  their 
view  accords  with  popular  sentiment.  There  is,  neverthe- 
less, room  for  doubt.  Is  it  really  certain  that  A,  whose 
income  is  reduced  from  ,£100  to  £90  is  worse  treated  than 
B  whose  ;£  1 00,000  is  brought  down  to  ,£90,000  ?  There  can 
be  no  dispute  as  to  the  wants  which  the  latter  will  have  to 
leave  unsatisfied  being  very  much  slighter  than  those  of  A, 

1  Cp.  Wealth  of  Nations,  375. 
U 


2QO  PUBLIC   FINANCE.  [BOOK  III. 

ivhen  looked  at  from  the  same  point  of  view.  But  the  point 
of  view  is  not  the  same,  B's  system  of  life  on  its  material 
side  is  so  differently  constituted  from  A's  that  any  com- 
parison of  the  kind  is  absurd  1.  £10  from  A's  income  may 
mean  the  loss  of  a  certain  amount  of  alcoholic  drinks ; 
B,  by  having  to  give  up  ^"10,000  may  lose  the  chance  of 
purchasing  an  estate,  or  may  have  to  abandon  some  social 
scheme  that  he  could  otherwise  have  carried  out.  The 
economic  calculus  is  not  at  present  competent  to  deal  with 
such  comparisons.  The  complexity  of  the  problem  is 
admittedly  great,  and  not  to  be  solved  by  simple  methods 2. 
The  weightiest  difficulty  that  the  theoretical  advocates  of 
progression  have  to  meet  is  the  essentially  subjective 
nature  of  their  standard.  Its  translation  into  an  objective 
rule  of  taxation  can  be  accomplished  only  by  the  aid  of 
assumptions  as  to  the  relations  of  enjoyment  in  different 
classes  that  must  contain  a  large  element  of  conjecture. 
The  modern  developments  of  the  theory  of  utility  fail  to 
supply  any  definite  practical  basis  on  which  to  frame  a 
scale  of  progression. 

Progressive  taxation  has  been  supported  by  a  very 
different  line  of  reasoning  in  Cohn's  brilliant  Treatise  on 
Finance 3.  Proportional  taxation  is  asserted  by  him  to  be 
the  logical  result  of  the  *  contract/  or  assurance  theory  of 
the  State.  In  accordance  with  that  belief,  it  was  fitting 
that  all  should  pay  the  same  proportion  of  income  in 
exchange  for  the  stipulated  services.  The  modern,  or 
'  higher '  conception  of  the  State,  abandons  altogether 
this  theory  of  the  social  compact,  and  therefore  its 
corollaries  in  which  is  included  the  rule  of  proportional 

1  See  Wicksteed,  Alphabet  of  Economic  Science,  for  a  clear  statement  of  the 
general  principle  applied  in  the  text.     Signer  M.  Pantaleoni  argues  that  the 
richer  person  (B)  may  even  suffer  more  if  (i)  the  additional  wealth  happens  to 
be  of  special  importance  to  him,  or  (2)  if  his  sensibility  be  keener. 

2  Cp.  Sax,  '  Die  Progression  ist  keine  vollstandig  regelmassige.     Je  nach  der 
Beschaffenheit  der  einzelnen  Bedurfnissgruppen  kann  sie  bald  geringer  sein, 
vielleicht  zum  Stillstand  gelangend,  bald  in  raschen  Spriingen  emporsteigen,' 
Staatsvuirthschaft,  512.  3§§2io,  211. 


CHAP.  III.]  THE   DISTRIBUTION   OF   TAXATION. 

taxation.  Writers,  who  like  Rau,  De  Parieu,  and  Leroy 
Beaulieu  reject  the  older  view  of  the  State's  relation  to  its 
subjects  and  yet  maintain  the  justice  of  proportional  taxa- 
tion are  guilty  of  inconsistency  explicable  only  by  their 
dread  of  the  often  described  evils  of  progressive  taxation. 

To  this  ingenious  contention,  the  answer  is,  that  granting 
the  deduction  of  proportional  taxation  from  the  'assurance 
theory/  the  refutation  of  the  latter  does  not  upset  the  former 
since  a  true  conclusion  may  result  from  false  premisses. 
But  even  this  concession  need  not  be  made.  It  has  been 
argued  in  the  present  chapter  that  the  exploded  doctrine 
of  *  assurance '  would  logically  lead  not  to  proportional, 
but  to  what  has  been  called  '  regressive,'  taxation,  i.e.  to  a 
lower  percentage  on  large  than  on  small  incomes  1. 

§  8.  Experience  of  the  actual  working  of  progressive 
systems  might  be  expected  to  throw  light  on  the  reality  of 
the  evils  attributed  to  them  and  their  real  operation.  A 
large  amount  of  evidence  has  been  collected  with  this*'object 
by  very  competent  inquirers  2,  but,  unfortunately,  the  results 
are  not  decisive.  Most  of  the  cases  discussed  are  those  of 
Swiss  cantons  or  the  smaller  German  States.  (The  short- 
lived income  tax  of  the  United  States,  and  the  apparent 
progressive  income  tax  of  Prussia  are  the  only  exceptions.) 
Now,  the  financial  arrangements  of  small  political  bodies 
are  undoubtedly  full  of  instruction  and  deserve  attentive 
study,  but  they  belong  to  the  domain  of  local  rather  than 
general  Finance.  The  conditions  of  working  are  therefore 
different,  and  there  is  to  some  extent,  room  for  the  use  of 
a  different  principle  of  distribution  3,  since  the  public  ser- 
vices rendered  by  local  bodies  do  often  allow  of  an  estima- 
tion of  their  value  to  individuals,  and,  besides,  have  to  be 
considered  in  connexion  with  the  taxation  of  the  State. 

1  The  progression  a  rebours  of  French  economists. 

a  Neumann,  Progressive  Einkommensteuer,  passim  ;  Leon  Say,  Les  Imp6ts 
Dlmocratiques,  i.  203-258  ;  ii.  225-264  ;  Leroy  Beaulieu,  i.  152-156,,  160-168  ; 
Cohn,  §§  213,  214;  Palgrave,  'Progressive  Taxation  in  Switzerland, 'Journal 
of  the  Statistical  Society,  li.  225-367. 

8  See  §  12 ;  also  ch.  6  of  the  present  Book,  '  Principles  of  Local  Taxation.' 

U  2, 


PUBLIC   FINANCE.  [BOOK  III. 

The  peculiar  economic  conditions  under  which  progressive 
taxes  have  been  applied  are  shown  in  the  discussions  re- 
specting their  merits  which  are  chiefly  concerned  with  the 
danger  of  forcing  capital  to  emigrate  and  that  of  undue 
discrimination  against  particular  persons.  Both  are  real 
and  serious  in  a  small  area ;  within  the  wider  boundaries 
of  a  nation  their  probability  would  be  smaller.  It  is  hardly 
conceivable  that  the  English  Chancellor  of  the  Exchequer 
should  arrange  his  scheme  of  taxation  with  reference  to 
any  small  number  even  of  the  wealthiest  tax-payers ;  nor 
would  the  emigration  of  capital  be  caused  by  even  a  fairly 
heavy  tax.  On  the  other  hand,  the  facilities  for  assessment 
are  much  increased  by  having  to  deal  with  a  limited  district 
in  which  the  income  and  property  of  each  resident  can  be 
ascertained  with  a  close  approach  to  the  truth,  and  as 
incomes  are  in  no  case  very  large,  there  is  not  the  same 
room  for  injustice.  Progressive  taxation  would  not  be\/ 
easily  applied  in  national  Finance.  The  forms  of  wealth 
are  very  numerous,  and  can  be  so  placed  as  to  escape  the 
tax-collector's  notice,  when  he  has  to  deal  directly  with 
income  as  a  whole.  We  have,  therefore,  no  evidence  suffi- 
cient to  modify  the  unfavourable  conclusion  reached  on 
general  grounds  respecting  progressive  taxation 1. 

§  9.  The  idea  of  securing  equality  of  sacrifice  while  es- 
caping the  dangers  of  unregulated  progression  has  led  to 
the  adoption  of  what  is  known  as  '  degressive  '  taxation  ;  a 
system  in  which  a  uniform  rate  of  tax  is  levied,  but  incomes 
under  certain  limits  are  either  altogether  exempt,  or  rated 
only  for  a  part  of  their  amount.  Some  of  the  so-called 
progressive  taxes  in  Switzerland  are  really  of  this  kind  : 
thus  in  Zurich,  500 /rancs  are  free,  the  excess  up  to  1,500 
francs  is  rated  at  only  one-fifth,  the  next  1,500  francs  at  two- 
fifths,  the  next  3000  at  three-fifths,  and  the  next  4000  at  four- 
fifths,  anything  beyond  being  rated  at  its  full  amount,  e.g. 
an  income  of  12,500  francs  (^500)  would  only  pay  on  8,300 

1  Particular  instances  of  progressive  taxes  will  be  considered  in  Bk.  iv.  ch.  4, 
'  Taxes  on  Propeity  and  Income.' 


CHAP.  III.]          THE    DISTRIBUTION   OF  TAXATION.  293 

francs l.  By  this  method  the  confiscation  of  the  higher 
portions  of  income  can  never  happen,  but  there  is  still  an 
arbitrary  power  of  fixing  the  several  scales  which  is  incon- 
venient, while  this  form  of  progression  is  particularly  open 
to  the  charge  of  unproductiveness,  and  is  somewhat  hard 
to  work  owing  to  the  minute  sub-divisions  that  are  usually 
made. 

Degressive  taxation  may,  however,  like  the  more  moderate 
forms  of  progression,  be  employed  rather  to  secure,  than  to 
destroy  proportionality  of  taxation,  as  it  affects  only  one 
part  of  the  tax  system,  and  may  correct  inequalities  in  other 
directions.  When  the  articles  consumed  by  the  poorer 
classes  are  heavily  taxed  they  would  contribute  more  than 
their  share  to  the  maintenance  of  the  State  were  they  not 
relieved  through  the  income  and  property  taxes.  This  is 
one  of  the  reasons  for  the  exemption  of  incomes  under 
.£150  from  income  tax  in  the  United  Kingdom,  and  the 
abatement  on  those  under  £400.  The  duties  on  tea, 
tobacco,  and  spirits,  which  chiefly  affect  the  smaller  incomes 
are  thus  balanced,  and  a  substantial  equality  (or  what  is 
believed  to  be  such)  attained.  The  rule  of  proportionality 
is  applicable  only  to  the  whole  tax-system,  and  it  may  be 
necessary  to  have  several  partial  inequalities  in  order  to 
establish  that  final  equality '  that  is  one  of  the  principal 

/     merits  in  Finance. 

§  10.  Another  ground  for  modifying  the  rule  of  propor- 

l^tional  taxation  exists  in  the  doctrine  that  net  income  is  the 
sole  available  fund  for  social  objects.  If  certain  kinds  of 
expense  be  necessary  and  unavoidable,  it  seems  that  any 
income  which  only  suffices  for  meeting  them  must  be 
exempt  from  taxation.  On  the  supposition  that  the 
labourer's  wages  are  just  enough  to  keep  him  alive,  the 

1  I.e.              500  Free  o 

1000  £  200 

1 500  §  600 

3000  £  1800 

4000  |  3200 


294  PUBLIC    FINANCE.  [BOOK  HI. 

slightest  extra  charge  will  lead  to  his  death  unless  he  is 
relieved  from  some  other  quarter.  Taxation  on  the  mini- 
mum of  subsistence  must,  by  the  nature  of  the  case,  be  paid 
by  somebody  else.  The  Physiocrats,  as  we  saw *,  extended 
this  argument  to  the  interest  on  capital,  but  their  successors 
have  not  accepted  this  extreme  view.  However,  the  doc- 
trine known  as  '  the  exemption  of  the  minimum  of  subsis- 
tence' is  widely  spread.  Among  its  supporters  in  one 
form  or  other  may  be  reckoned  Justi,  Bentham,  Sismondi, 
Hermann  and  J.  S.  Mill,  and  it  has  received  recognition  in 
the  English  system  of  taxation,  since  there  are  no  duties  on 
the  necessaries  of  life,  and,  as  mentioned,  incomes  under 
£150  per  annum  are  free  from  direct  taxation2.  The 
different  interpretations  put  on  the  doctrine  need  to  be 
distinguished.  The  primitive  and  most  natural  meaning 
is  that  which  limits  it  to  the  absolute  necessaries  of  exis- 
tence, though  here  there  is  room  for  doubt  as  to  the 
correctness  of  including  the  expense  of  maintaining  a  family 
under  this  head.  The  wider  use  of  the  term  to  cover  *  the 
sum  of  the  means  of  support  which,  according  to  the 
standard  of  a  given  period,  is  required  for  the  conduct  of  an 
existence  worthy  of  man  3 '  would  extend  the  exemption  far 
beyond  the  limit  of  physical  necessaries,  and  would  almost 
approach  to  the  exclusion  of  whatever  expenditure  is  neces- 
sary for  the  earning  of  the  person's  income  from  the  amount 
to  be  taxed 4.  By  regarding  the  outlay  requisite  for  the 
support  of  each  grade  of  income  as  its  expenses  of  pro- 
duction, we  might  bring  the  fund  available  for  taxation 
down  to  a  very  small  amount. 

1  Bk.  iii.  ch.  2.  §  6. 

2  The  effect  of  local  rates  and  the  repercussion  of  taxation  do  in  fact  put  some 
of  the  pressure  on  the  very  poor,  but  the  statement  in  the  text  is  generally  true 
of  the  immediate  effect  of  Imperial  taxation. 

3  Schmidt,  Steuerfreiheit  des  Existenzminimums,  4,  5. 

4  The  criterion  of  '  necessaries '  varies  according  to  the   class   concerned. 
'  We  may  say  that  the  income  of  any  class  in  the  ranks  of  industry  is  below  its 
necessary  level,  when  any  increase  in  their  income  would,  in  the  course  of  time, 
produce  a   more   than   proportionate   increase  in    their  efficiency,'  Marshall, 
Principles  of  Economics,  i.  122. 


CHAP.  III.]          THE    DISTRIBUTION   OF   TAXATION.  295 

Such  a  construction  of  the  doctrine  may  be  dismissed  as 
impracticable.  The  subject's  outlay  is  determined  by 
himself  and  is  directed  for  his  own  advantage.  The  only 
ground  for  doubt  would  be  the  possibility  of  expenditure  on 
these  '  necessary '  items  being  curtailed  in  consequence  of 
the  tax.  This  effect  would  be  very  improbable  unless  the 
rate  of  taxation  were  so  heavy  as  to  show  bad  administra- 
tion, but  even  in  the  limited  case  of  physical  necessaries  the 
argument  for  remission  is  not  so  clear  as  might  be  thought. 
The  danger  of  relieving  the  lowest  class  of  labourers  from 
nearly  all  the  burdens  of  the  State,  while  it  holds  pre- 
ponderating political  power  is  apparent.  Again,  there  is 
much  force  in  the  view  that  public  expenses  are  a  part  of 
necessary  expenditure.  '  The  State,'  argues  Cohn, '  belongs 
as  much  to  the  life  of  every  civilized  man  as  his  daily  food, 
or  the  air  ;  without  the  State  a  civilized  existence  is  not 
thinkable.  The  minimum  of  every  moral  existence  includes 
the  blessings  of  the  State.  It  follows  that  the  minimum  of 
outlay  for  existence  must  also  include  the  necessary  ex- 
penseNgf  the  State  V  Why  should  not  the  poorest  citizen 
pay  something  towards  security  as  well  as  purchase  the 
bread  that  supports  him?  The  practical  side  of  the 
question  seems  rather  to  favour  the  existing  English  policy. 
So  far  as  the  argument  from  ability  is  concerned  it  is  plain 
that  those  who  barely  possess  the  means  of  subsistence 
have  little  or  no  ability  to  contribute.  In  any  country 
where  legal  provision  is  made  for  poor  relief  it  would  seem 
that  to  tax  those  at  the  point  of  subsistence  would  be 
simply  driving  them  into  the  ranks  of  pauperism,  and 
taking  with  one  hand  to  give  back  with  the  other.  The 
cost  and  trouble  of  raising  money  by  direct  taxation  from 
the  poorer  classes,  added  to  the  foregoing  consideration, 
strongly  supports  the  method  of  exemption  from  direct 
taxation  of  the  smaller  incomes  with  the  employment  of 

1  In  Political  Science  Quarterly,  iv.  64-5 ;  cp.  '  Der  Staat  ist  fur  alle  ein 
Bediirfniss,  seine  Existenz  ist  fiir  die  Gesammtheit  nothwendiger  als  das  Lebeu 
eines  Jiinzelnen,'  Held,  Einkommensteuer,  103. 


296  PUBLIC    FINANCE.  [BOOK  III. 

moderate  taxes  on  the  luxuries  of  the  poor.  When  exemp- 
tion is  claimed  for  the  minimum  it  can  only  be  on  the 
ground  that  it  will  be  employed  in  buying  necessaries  ; 
any  other  application  of  this  amount  fairly  brings  it  under 
the  weight  of  taxation l. 

/  §  11.  The  question  of  justice  may  also  be  raised  in 
respect  of  incomes  that  differ,  not  in  amount  but  irueiugin. 
As  usually  debated  the  point  is  confined  to  the  case  of  an 
income  tax,  but  it  is  really  wider  and  applies  to  all  forms. 
To  put  the  issue  in  the  simplest  way  let  us  suppose  that  of 
two  persons  one,  A,  obtains  by  his  exertions  £$oo  per 
annum,  the  other,  B,  obtains  the  same  sum  from  the  rent 
of  land  or  interest  on  capital.  Is  it  just  or  expedient  that 
A  should  pay  the  same  sum  in  taxes  that  B  does  ?  The 
most  natural  answer  is,  perhaps,  a  negative  one,  and  many 
persons  have  proposed  that  the  ca^itaLj^alues  of  the  two 
incomes  should  be  taken  as  the  basis  of  taxation2.  A 
little  reflection  will  show  that  under  certain  conditions 
there  is  nothing  unjust  in  the  arrangement.  A's  income 
it  is  true  is  less  durable,  but  then  so  is  its  chance  of 
taxation.  The  permanence  of  B's  receipts  involves  like- 
wise permanence  of  taxation.  So  long  then  as  the  public 
charges  are  uniform,  there  is  no  reason  for  complaint. 
Special  occasions  will  sometimes  occur  in  which  extra- 
ordinary expenditure  actually  is,  or  is  deemed  to  be,  ne- 
cessary, and  then  it  seems  that  as  there  is  an  extraordinary 
call  it  ought  to  come  from  the  capital  rather  than  the 
income  of  the  community.  A  convenient  mode  of  realizing 
this  end  would  be  the  imposition  of  an  additional  property 
tax,  which,  being  met  out  of  the  income  of  the  holders, 
would  accomplish  the  end  of  taxing  permanent  incomes  at 

1  Mill's  view  on  the  subject,  though  his  conclusion  is  the  same  as  that  in  the 
text,  appears  to  be  inconsistent  with  his  views  on  population  and  his  criticism 
of  allotments  {Principles,  Bk.  ii.  ch.   12.  §  4).     Would  not  taxation  of  the 
minimum  tend  to  check  population,  and  remission  of  it  tend  to  increase  it  ? 

2  See  the  Reports  and  Evidence  of  the  Parliamentary  Committees  on  the 
Income  Tax  1852-3  and  1861,  especially  the  evidence  of  Newmarch,  Farr, 
and  J.  S.  Mill. 


CHAP.  III.]  THE   DISTRIBUTION   OF  TAXATION.  297 

a  higher  rate.  Another  mode  would  be  to  meet  the 
increased  outlay  by  loans  to  be  repaid  in  a  series  of  years. 

In  practice  the  difficulty  is  not  so  great ;  the  distribution 
of  burdens  can  never  be  accomplished  with  mathematical 
precision.  The  avoidance  of  real  and  serious  grievances  is 
all  that  can  be  expected,  and  the  actual  working  of  the 
financial  system  meets  these  in  a  tolerably  satisfactory 
manner.  Necessity  compels  recourse  to  loans  whenever 
there  is  any  large  extraordinary  outlay,  and  thus  the 
particular  holders  of  incomes  from  labour  do  in  fact  escape. 
Again  the  two  categories  are  not  so  sharply  divided  as  is 
supposed  ;  they  shade  into  each  other  at  many  points  ;  and, 
moreover,  the  return  on  property  (as  distinct  from  '  unearned 
increment ')  is  itself  the  result  of  saving  and  entitled  to  as 
liberal  treatment  as  any  other  form  of  revenue.  The 
technical  difficulties  that  any  attempts  to  differentiate 
incomes  would  lead  to  belong  to  a  later  part  of  our 
inquiry l. 

The  foregoing  considerations  help  us  to  meet  a  very 
different  proposal  also  aiming  at  a  departure  from  the  rule 
of  taxation  in  proportion  to  income,  viz.  that  which  asserts 
that  expenditure  alone  should  be  taxed,  what  is  saved 
being  entirely  exempt.  The  reasons  given  for  this  privilege 
are  (i)  that  saving  is  not  enjoyment,  but  a  useful  social 
process  that  deserves  encouragement ;  and  (2)  that  unless 
exempted  savings  would  pay  twice  over,  viz.  first  at  their 
origin,  and  again  when  they  yield  a  further  return  after 
investment.  It  may  be  freely  allowed  that  to  encourage 
providence  is  desirable,  but  it  does  not  follow  that  exemp- 
tion from  taxation  is  the  proper  mode  for  so  doing.  If 
income  be  the  normal  fund  from  which  taxation  comes, 
and  if  it  is  on  its  amount  that  the  measurement  of  the 
burden  is  to  be  taken,  an  arbitrary  separation  of  a  certain 
part  is  obviously  objectionable.  The  line  between  saving 
and  expenditure  is  besides  a  thin  one ;  the  true  distinction 
should  rather  be  between  productive  and  unproductive 

1  Bk.  iv.  ch.  4,  '  Taxes  on  Property  and  Income.' 


298  PUBLIC    FINANCE.  [BOOK  III. 

expenditure,  i.  e.  the  result  of  outlay  ought  to  be  the  test,  a 
plainly  impossible  course  in  practice.  Further  it  may  be 
said  that  many  forms  of  productive  outlay  are  just  as 
enjoyable  as  any  non-productive  one,  and  some  forms  of 
the  latter  are  sociably  preferable  to  others.  There  is  in 
reality  no  reason  for  a  sharp  division  into  two  classes, 
whether  we  take  enjoyment  or  social  advantage  as  the 
basis.  Practical  Finance  could  not  deal  with  such  shades 
of  difference  as  would  be  the  apparently  fair  course.  The 
same  consideration  may  be  applied  to  the  case  of  tempo- 
rary and  durable  incomes,  the  former  of  which  are  very 
variable  in  character. 

To  the  plea  of  double  taxation  it  may  be  replied  that 
taxation  is  imposed  on  income  as  such,  that  the  wealth 
which  is  taxed  as  income  is  not  identical  with  the  extra 
produce  that  is  the  result  of  its  application,  and  the  charge 
on  each  is  distinct.  The  income  out  of  which  savings  are 
made  cannot  be  the  same  as  the  subsequent  income  pro- 
duced by  those  savings 1. 

There  is  it  should  also  be  noticed  a  direct  opposition 
between  the  proposal  to  relieve  temporary  incomes,  and 
that  to  exempt  savings  from  taxation.  What  is  the  net 
advantage  of  getting  a  premium  to  save  only  to  discover 
that  the  earnings  which  result  from  that  saving  will  be 
subject  to  heavier  payments?  The  broad  and  simple 
principle  of  taxing  all  incomes  alike  and  of  taxing  all  that 
is  income  (allowance  being  made  for  the  action  of  taxes  on 
consumption  in  the  case  of  the  smaller  incomes)  appears  to 
attain  the  result  of  just  distribution  quite  as  well  as  the 
more  refined  discriminations  so  often  suggested.  Should 
any  further  adjustment  seem  necessary  in  a  particular 
system  it  may  be  reached  by  a  nominal  property  tax  2  or 
by  duties  on  inheritance. 

§  12.  The  principal  theories  and  contentions  on  the 
subject  of  the  just  division  of  taxation  have  now  been 

1  See  Vocke,  Abgaben,  471-2. 

a  1.  e.  a  tax  assessed  on  amount  of  property,  but  really  paid  out  of  income. 


CHAP.  III.]          THE   DISTRIBUTION   OF   TAXATION.  299 

considered,  and  it  remains  to  state  the  general  results 
which  seem  to  be  warranted.  The  attempt  to  measure 
taxation  by  service  rendered  has  been  recognised  as  hope- 
less and  due  to  an  erroneous  theory  of  the  State's  nature, 
but  it  contains  a  small  element  of  truth.  Where  specific 
and  measurable  advantages  are  rendered  to  individuals  or 
groups  direct  payment  for  those  services  ought  to  be 
obtained,  either  in  the  course  of  exchange  or  by  the  pay- 
ment of  fees  or,  if  either  method  cannot  be  employed,  by  a 
special  tax.  Cases  of  the  latter  are  very  rare  in  general, 
but  they  hold  a  more  prominent  place  in  local  Finance. 
Indeed,  as  we  shall  see,  the  division  between  local  and 
general  taxation  is  itself  a  case  of  making  those  interested 
pay  for  special  services,  and  in  the  detailed  division  of  local 
charges  the  same  principle  can  often  be  carried  out. 

The  use  of  '  ability '  or  '  faculty '  as  a  measure  is  en- 
cumbered by  the  necessity  of  defining  its  true  meaning. 
We  have  seen  reason,  chiefly  on  practical  grounds,  for 
rejecting  that  interpretation  which  issues  in  the  system  of 
'progressive'  taxation.  Its  fiscal  productiveness  is  slight 
while  its  economical  effects  are  likely  to  be  injurious. 
Between  the  system  of  payment  as  recompense  for  state 
services  which  would  naturally  lead  to  regressive  taxation 
and  the  system  of  progression  resting _pn  th^  -utea—tiiat 
sacrifice  should  be  equalized,  the  intermediate  method  of 
taxation  in  proportion  to  income  is  on  the  whole  the  best 
standard  for  regulation.  Its  true  foundation  needs  to  be 
carefully  appreciated.  It  cannot  claim  to  be  a  realization 
of  exact  distributive  justice  ;  it  is  rather  to  be  accepted  as  a 
convenient  and  fairly  definite  working  rule  of  Finance,  or  at 
the  utmost  as  supplying  a  measure  of  what  may  be  called 
the  objective  side  of  ability.  Income,  when  the  lower 
grades  are  passed,  is,  we  may  hold,  a  fairly  good  mark  of 
power  to  contribute,  provided  we  make  abstraction  of  in- 
dividual circumstances. 

In  the  same  spirit  we  can  solve  the  problem  raised  by 
the  existence  of  incomes  at  the  minimum.  Financial  con- 


300  PUBLIC   FINANCE.  [BOOK  III. 

venience  combines  with  economic  conditions  to  make  it 
desirable  to  exempt  the  smaller  revenues  from  direct  taxa- 
tion where  the  duties  on  articles  of  common  consumption 
are  productive.  Where  it  is  possible  to  relieve  necessaries 
from  taxation  the  minimum  of  existence  is  in  fact  free ; 
where  the  needs  of  the  Exchequer  prevent  this  being  done 
the  pressure  placed  on  the  lowest  class  is  of  a  kind  not 
much  felt  by  them  unless  the  rate  of  taxation  is  excessive. 
To  tax  the  very  poorest  is  a  sad  necessity,  but  where  the 
want  of  revenue  is  urgent,  not  inconsistent  with  justice : 
there  is  a  real  advance  when  national  wealth  has  reached 
so  high  a  point  that  the  lowest  class  are  called  on  to  con- 
tribute only  through  their  luxuries,  but  the  highest  stage  is 
that  in  which  the  improvement  of  society  is  such  that  all 
classes  are  in  a  position  to  pay  their  share  as  citizens  for 
the  common  services  of  the  State. 

The  distinction  between  temporary  and  permanent  in- 
comes, as  also  that  between  expenditure  and  savings,  may, 
it  appears,  be  disregarded  as  involving  subtleties  unsuitable 
for  fruitful  application  and  to  a  great  extent  cancelling 
each  other.  The  result  is  therefore  that  on  the  whole, 
and  speaking  broadly,  taxation  should  be  proportioned  to 
revenue,  by  which  a  fair  approximation  to  justice  and  a 
convenient  basis  of  working  are  supplied. 

§  13.  One  class  of  revenue  is  so  peculiarly  situated  that 
its  position  deserves  further  notice,  viz.  that  which  arises 
from  '  unearned  increment '  in  the  widest  sense  of  the 
term,  including  the  growth  of  rent  from  land,  monopoly 
profits  and  the  gains  of  speculation  \  The  characteristics 
of  this  class  seem  to  have  marked  it  out  as  specially 
suited  for  taxation.  The  physiocratic  tax  on  land  was 
not,  indeed,  due  to  this  idea  of  it  as  yielding  a  monopoly 
gain,  but  the  practical  result  was  just  what  it  would  have 
been  in  that  case.  Adam  Smith  distinctly  notes  the  fitness 
\  of  unearned  gains  for  special  taxation.  '  Ground  rents  and 

1  All  included  in  the  German  '  Conjuncturgewinn ' ;  cp.  Prof.  Marshall's 
explanation  of '  Conjuncturj  Principles  of  Economics,  i.  656. 


CHAP.  III.]          THE   DISTRIBUTION   OF  TAXATION.  30! 

the  ordinary  rent  of  land  are/  he  holds, '  perhaps  the  species 
of  revenue  which  can  best  bear  to  have  a  peculiar  tax  im- 
posed upon  them Nothing  can  be  more  reasonable  than 

that  a  fund  which  owes  its  existence  to  the  good  goverti- 
ment  of  the  State  should  be  taxed  peculiarly  Y  while  later 
on  he  widens  his  view  by  declaring  that  '  the  gains  of 
monopolists  whenever  they  can  be  come  at/  are  '  certainly 
of  all  subjects  the  most  proper '  for  taxation,  a  doctrine  the 
truth  of  which  as  a  general  statement  can  hardly  be  denied. 
When  regarded  by  itself  unearned  wealth  seems,  as  it  were, 
designated  to  supply  the  public  wants  of  the  community  2, 
and  there  is  no  reason  for  surprise  at  the  popularity  of  any 
proposals  in  that  direction.  But  the  imposition  of  taxation 
must  be  studied  not  simply  with  regard  to  a  single  general 
fact,  but  to  the  whole  economic  and  financial  constitution 
of  the  society.  The  obstacles  in  the  way  of  this  form  of 
special  taxation  are  serious  enough.  To  begin  with,  it  is 
not  always  easy  to  say  what  gains  are  '  unearned.'  The 
rent  of  land  and  the  receipts  from  pure  speculation  are  the 
first  examples,  but  the  line  that  separates  pure  rent  from 
profit  rent  is  not  so  readily  determined.  As  Adam  Smith 
remarks  in  this  connexion,  *  The  ordinary  rent  of  land  is 
in  many  cases  owing  partly  at  least  to  the  attention  and 
good  management  of  the  landlord  3.'  The  gain  from  land 
is  in  a  new  country  profit  rather  than  rent 4,  and  as  society 
advances  the  investment  of  capital  in  land  improvements 
complicates  the  problem.  In  the  case  of  commercial  specu- 
lation it  is  not  pure  accident  that  determines  gain.  Specu- 
lation is  rather,  as  Cohn  well  describes  it.  the  struggle  of 
intelligence  against  chance 5.  To  tax  the  profits  of  specu- 

1   Wealth  of  Nations,  356,  378. 

3  For  a  forcible  statement  of  this  view  see  George,  Social  Problems,  205-208. 

3  Wealth  of  Nations,  356. 

4  Cp.  Sumner,  Life  of  Jackson,  184-5  ;  Marshall,  Principles,  494-5. 

5  '  Die  Speculation  isl  nicht  bloss,  wie  Lassalle  behauptet,  "ein  Rat  hen  auf  die 
Wirkungen,  ivelche  die  unwissbaren  Umstande  hervorbringen  werden"     Sie 
ist  mehr  als  das.   Sie  ist  der  Kampf  der  mit  Kenntniss  dcr  wissbaren  Umstande 
ausgeriisteten  Intelligenz  gegen  die  rohe  Uebcrmacht  des  Z^^fallsj  Cohn,  §  343. 


302  PUBLIC    FINANCE.  [BOOK  III. 

lation  would  check  the  operation  of  the  economizing  force 
of  competition.  Monopoly  gains  are  better  fitted  for  extra 
burdens,  and  where  excessive  profit  is  obtained  through 
natural  or  legal  monopoly  there  is  a  fair  case  for  obtain- 
ing at  least  some  of  the  advantage  for  the  public.  But 
these  cases  are  so  few  as  to  form  but  a  trivial  financial 
resource.  Railways,  banks,  and  some  other  companies  are 
the  principal  examples  of  possible  monopoly,  and  among 
them  the  amount  of  excessive  profit  is  not  considerable. 
Two  further  circumstances  diminish  still  more  the  impor- 
tance of  this  extra  source  of  tax  revenue,  viz.  (i)  the  exis- 
tence of  losses  that  counterbalance  unearned  gains.  If 
individuals  engage  in  a  venture,  be  it  cultivation  of  land 
or  industrial  enterprise,  they  can  hardly  be  called  on  to 
give  up  their  surplus  gains  unless  they  are  guaranteed 
against  possible  loss.  A  landholder  will  not  care  to  open 
up  his  property  with  the  certainty  before  him  that  his 
accruing  '  producer's  surplus '  will  be  appropriated  by  the 
State,  while  he  has  no  security  for  ordinary  interest  on  his 
outlay.  The  like  sentiment  will  be  even  stronger  in  indus- 
try and  commerce  than  in  agriculture.  Just  as  weighty  is 
(2)  the  fact  that  with  a  system  of  private  ownership  and 
a  developed  economic  organization  the  claims  to  these 
'unearned  gains'  are  in  a  constant  process  of  transfer,  and 
future  values  are  estimated  in  the  prices  given.  The  antici- 
pated future  movement  of  rent  is  registered  in  the  price  of 
land.  Premiums  on  shares  measure  the  gain  from  specu- 
lation or  monopoly.  Justice  could  therefore  be  attained 
only  by  taxing  each  increase  immediately  on  its  existence 
being  noticed,  an  evidently  hopeless  endeavour.  For  these 
reasons  it  is  desirable  to  narrowly  limit  special  taxation  of 
monopoly  values  to  the  clearest  and  best  established  cases, 
and  for  the  rest  to  rely  on  the  increased  productiveness  that 
this  unearned  wealth  will  give  to  the  ordinary  taxes.  This 
conclusion  it  may  be  added  does  not  apply  to  any  existing 
land  taxes -which  may  be  plausibly  regarded  as  reserved 
rents,  nor  does  it  cover  the  specially  interesting  case  of 


CHAP.  III.]  THE    DISTRIBUTION   OF   TAXATION.  303 

ground  rents  in  towns  where  the  effect  of  public  expendi- 
ture introduces  a  new  and  difficult  element,  and  which 
strictly  belongs  to  the  domain  of  local  Finance1. 

§  14.  So  far  we  have  dealt  with  taxation  as  if  it  were 
applied  to  a  single  country  or  district  in  complete  isolation, 
and  have  sought  to  arrive  at  the  rule  of  just  distribution 
among  its  inhabitants.  Modern  societies  and  a  fortiori 
limited  districts  are  not  so  placed.  Many  of  their  inha- 
bitants draw  income  from  outside  the  particular  area. 
Foreigners  hold  property  within  it,  and  there  are  sure  to 
be  complex  legal  relations  between  residents  and  non- 
residents. Hence  it  is  necessary  to  examine  the  difficult 
class  of  problems  usually  described  under  the  title  of 
*  double  taxation.'  We  have  not  to  consider  the  case  of 
different  taxes  imposed  by  a  State  on  the  same  object  in 
different  ways.  Taking  the  rule  of  taxation  to  be  propor- 
tionality to  income,  any  taxation  that  attains  that  end  is 
right ;  what  fails  to  reach  it  is  so  far  imperfect.  Nor  need 
we  trace  the  operation  of  the  corporation  tax.  Juristic 
persons  are,  for  Finance,  but  intermediaries  by  which 
the  individual  members  can  be  reached.  The  taxation  of 
corporations  is  the  taxation  of  their  members,  and  the 
pressure  of  the  tax  on  them  is  to  be  taken  into  account 
along  with  the  other  taxes  in  estimating  the  total  burden. 
This  elimination  of  so  many  of  the  points  usually  treated  2 
allows  us  to  direct  attention  at  once  to  the  international 
relations.  These  cases  are  three  in  number  and  may  be 
arranged  as  follows — (i)  Where  a  citizen  emigrates  with  all 
his  property.  Here  it  is  plain  that  he  is  only  amenable  to 
the  laws  of  his  adopted  country ;  there  is  no  power  on  the 
part  of  his  native  land  to  levy  taxes  on  him  and  no  justice 
in  doing  so.  (2)  A  citizen  may  reside  abroad  and  derive 

1  For  state  ownership  of  land  see  Bk.  ii.  ch.  2.  §  4.     On  the  Land  Tax  see 
Bk.  iv.  ch.  i  ;  and  for  taxation  of  ground  rents  ch.  6.  §  5  of  the  present  Book. 

2  For  a  full  and  able  discussion  of  the  questions  referred  to  see  E.  R.  A. 
Seligman,   '  The  Corporation   Tax,'  No.  iii.   Political  Science   Quarterly,  v. 
636-675. 


304  PUBLIC    FINANCE.  [BOOK  III. 

his  income  from  his  original  home.  In  this  case  double 
taxation  may  exist.  The  country  of  residence  may  tax 
all  the  income  and  the  country  of  birth  may  tax  all  the 
property  situated  within  it.  (3)  The  remaining  case  is  the 
converse  of  the  preceding.  A  resident  native  may  possess 
property  abroad,  and  be  taxed  on  it  in  both  countries.  This 
too  would  be  plainly  double  taxation. 

What  principle  of  justice  should  be  applied  to  Nos.  2 
and  3  ?  The  old  protection  theory  would  say  that  the 
country  of  residence  should  be  paid  for  guarding  the 
person,  and  that  where  the  property  lies  for  watching  over 
it.  The  more  modern  solution  would  be  that  where  there 
was  a  judicious  arrangement  of  taxes  the  income  tax  should 
be  levied  by  the  country  of  residence,  the  land  or  property 
taxes  by  that  of  situation.  Local  rates  would  clearly  belong 
to  the  latter,  while  the  former  would  have  the  benefit  of  the 
indirect  taxes  on  the  subject's  consumption.  Were  the 
cases  of  conflict  numerous  the  best  solution  would  be  found 
in  international  agreements  on  the  basis  just  indicated,  and 
where,  as  in  the  German  States  and  Swiss  cantons,  there  is 
a  central  power  it  would  seem  that  the  determination  of 
the  adjustment  should  be  given  to  it.  The  solution  for 
like  cases  in  local  taxation  is  to  be  differently  reached  *. 

§  15.  Our  judgment  as  to  the  equity  of  any  particular 
distribution  of  the  pressure  of  taxation  will  depend  on  the 
view  that  we  take  of  the  objects  to  be  attained.  Even 
when  taxation  is  limited  to  the  supply  of  the  public  wants 
the  proper  division  of  its  weight  may  vary  according  to  the 
amount  and  character  of  the  services  supplied  by  its  em- 
ployment. Where  state  functions  are  confined  to  the  nar- 
rowest possible  field  the  poorer  classes  may  claim  to  bear 
a  smaller  share  than  if — as  in  many  modern  societies — they 
were  largely  benefited  by  public  expenditure.  But  from 
the  difficulty  of  discrimination  it  seems  better  to  adhere 

1  On  this  question  cp.  Cohn,   §§   223-228*;    Roscher,   §   63;    Wagner,  ii. 
406  sq. 


CHAP.  III.]         THE    DISTRIBUTION   OF   TAXATION.  305 

to  the  general  rule  of  distributing  taxation  without  direct 
reference  to  the  results  of  expenditure  on  the  different 
classes.  Injustice  of  this  kind  ought  to  be  corrected  not 
by  redistribution  of  taxation  but  by  alteration  of  outlay. 

There  is  a  tendency  in  recent  years  to  take  a  wider  view 
of  the  functions  of  taxation  than  the  purely  financial  one. 
Its  agency  is  regarded  as  valuable  not  solely  for  the 
resources  that  it  brings  into  the  State  but  for  the  effect 
that  it  produces  on  the  distribution  of  wealth.  By  the  use 
of  a  properly  adjusted  tax  system  the  inequalities  of  wealth 
may,  it  is  thought,  be  reduced  if  not  entirely  removed,  and 
one  of  the  aims  of  Socialism  approached  without  revolution. 
Such  is  Wagner's  position  when  he  declares  for  the  '  politico- 
social  '  conception  of  taxation  in  opposition  to  the  '  pure 
financial '  one.  This  change  in  standpoint  must  of  neces- 
sity change  the  mode  of  estimating  the  justice  of  taxation. 
What  is  wise  and  prudent  when  we  aim  simply  at  supply- 
ing the  requirements  of  the  public  powers  in  the  fairest  and 
cheapest  way  ceases  to  be  such  when  it  is  sought  to  bring 
about  a  supposed  better  distribution  of  wealth.  Propor- 
tional taxation,  caution  in  taxing  unearned  wealth,  and 
moderation  in  expenditure,  may  be  admitted  to  be  the 
logical  results  of  the  '  financial '  conception  :  progressive 
taxation  with  a  high  rate  of  increase,  rigorous  fiscal  super- 
vision of  all  gains  except  those  from  labour,  and  bold 
attempts  at  improving  the  condition  of  the  poorer  classes 
by  state  outlay  in  various  directions  will  be  the  natural 
outcome  of  the  '  social '  attitude 1.  There  is  a  change  of 
aim  which  necessitates  a  corresponding  change  in  the  appro- 
priate methods. 

The  general  arguments  on  the  subject  of  socialistic  inter- 
ference do  not  concern  us  here,  but  the  results  of  financial 
experience  are  of  some  value  in  respect  to  the  use  of  taxa- 
tion for  other  than  fiscal  purposes.  The  taxing  power  has 


1  See  Wagner,  i.  47,   500 ;    ii.  381   sq.,  455-459,   for   a   statement  of  the 
'  social '  view. 

X 


306  PUBLIC    FINANCE.  [BOOK  III. 

been  often  employed  to  encourage  industry,  to  improve 
taste,  to  benefit  health,  or  to  elevate  morals,  but  in  none  of 
these  applications  has  the  desired  success  been  obtained. 
There  is,  therefore,  a  presumption  against  its  use  in  remedy- 
ing the  inequalities  of  wealth.  Its  definite  and  universally 
recognised  function  is  the  supply  of  adequate  funds  for 
the  public  services.  To  mix  up  with  one  very  important 
object  another  different  and  perhaps  incompatible  one  is  to 
run  the  risk  of  failing  in  both.  It  is  within  the  power  of 
financial  skill  to  so  select  the  forms  and  rates  of  taxation 
as  to  secure  the  requisite  amount  without  unfair  pressure 
on  any  class,  but  if  the  ulterior  effects  on  the  distribution 
of  wealth  have  to  be  considered,  and  the  adjustment  made 
to  attain  particular  ends  in  that  respect,  the  difficulties  of 
the  task  are  enormously  increased.  If  the  socialistic  regime 
is  to  be  the  goal  aimed  at,  there  are  more  direct  and  more 
effective  modes  open  than  the  manipulation  of  taxation. 

§  16.  At  the  opposite  pole  to  the  doctrine  that  Finance 
should  aim  not  solely  at  preserving  justice,  but  at  remedy- 
ing injustices  already  existing  in  the  social  system  is  that 
which  refuses  to  see  anything  of  justice  in  financial  problems. 
For  the  upholders  of  this  view  the  distribution  of  taxation 
is  reduced  to  placing  the  burden  where  it  will  give  the  least 
trouble  and  friction  in  collection.  McCulloch's  often-quoted 
statement  that  '  the  characteristic  of  the  best  tax  is  not  that 
it  is  most  nearly  proportioned  to  the  means  of  individuals, 
but  that  it  is  easily  assessed  and  collected,  and  is  at  the  same 
time  most  conducive  to  the  public  interests  M  is  a  sufficiently 
clear  expression  of  the  view  which  is  a  very  natural  feeling 
among  practical  administrators.  An  escape  from  the 
difficult  questions  that  the  problem  of  justice  must  always 
present  is  a  pleasing  prospect,  though  unfortunately  based 
on  illusion,  since  injustice  in  distribution  is  certain  sooner 
or  later  to  show  itself  in  the  difficulties  that  the  practical 
financier  wishes  to  avoid.  All  the  conditions  of  a  good 

1  Taxation  and  Funding,  18. 


CHAP.  III.]          THE    DISTRIBUTION   OF  TAXATION.  307 

system  of  taxation  are  interdependent,  and  the  breach  of 
one  reacts  on  the  other.  The  observance  of  the  mere  tech- 
nical rules  at  the  expense  of  justice  will  not  be  successful 
any  more  than  the  utmost  straining  after  fairness  without 
regard  to  the  other  conditions  which  we  proceed  to  examine 
in  the  next  chapter. 


x  2 


CHAPTER    IV. 

THE  TAX  SYSTEM  :  ITS  FORMS. 

§  1.  THE  construction  of  a  system  of  taxation,  like  all 
works  of  art,  is  the  result  of  a  combination  of  materials  de- 
rived from  different  quarters.  To  attain  success  it  is  neces- 
sary to  bear  in  mind  certain  general  facts  respecting 
the  economic  structure  of  society :  the  important  aim 
of  realizing  substantial  justice  in  the  apportionment  of 
burdens  must  never  be  lost  sight  of,  and  in  addition  the 
financial  and  constitutional  conditions  require  to  be  duly 
considered.  It  is  to  this  latter  class  of  problems  that  the 
present  chapter  will  be  devoted,  and  we  shall  see  what  form 
the  tax  system  ought  to  take  in  order  to  satisfy  these 
various  requirements  and  be  at  the  same  time  effective  for 
what  is  after  all  its  primary  function — the  supply  of  ade- 
quate resources  for  the  public  service. 

The  facts  of  past  and  existing  financial  institutions,  when 
compared  with  the  general  principles  discussed  in  the  pre- 
ceding chapters,  present  at  first  sight  a  curious  contradic- 
tion. Taxation  we  discovered  was  normally  a  deduction 
I  from  the  national  income,  and  ought  to  be  divided  among 
the  citizens  in  proportion  to  the  share  of  that  income 
possessed  by  each.  Though  some  qualifications  of  this 
statement  were  made  1  such  was  the  broad  general  result : 
from  which  it  would  seem  to  follow  that  the  amount 

1  See  Ek.  iii.  ch.  2.  §§  6-7  ;  ch.  3.  £§  10-11. 


CHAP.  IV.]  THE   TAX   SYSTEM  :    ITS    FORMS.  309 

needed  should  be  levied  from  the  tax-payer  in  a  single 
payment  in  proportion  to  his  ascertained  income.  In  fact 
the  single  tax  would,  we  might  think,  be  the  necessary  de- 
duction from  established  principles. 

On  turning  to  the  facts  of  practical  Finance  the  state  of 
things  is  very  different.  No  country  possesses  this  simple 
and  logical  arrangement.  Instead  of  a  single  tax  there  is 
a  prodigious  number  of  imposts  varying  according  to  place 
and  time,  and  very  hard  to  reduce  to  any  reasonable  classi- 
fication. Taxes  on  every  form  of  production,  on  nearly 
every  commodity,  and  on  most  of  the  transactions  of  life, 
may  be  found  in  the  history  or  statistics  of  Finance. 

One  partial  explanation  is  that  which  regards  the  com- 
plexity of  the  public  charges  as  due  to  ignorance  or  love  of 
routine  on  the  part  of  practical  financiers.  The  beginning 
of  the  tax  system,  obscured  as  it  was  by  the  other  forms  of 
state  receipts,  was  due  to  fiscal  necessity.  The  extraordinary 
levies  of  the  sovereign  were  made  on  the  wealth  most  easily 
reached  and  owned  by  the  feeblest  members  of  the  com- 
munity. '  To  raise  the  largest  sum  of  money  with  the  least 
trouble'1  is  an  inadequate  description  of  the  functions  of  a 
modern  finance  minister,  but  it  was  the  sole  aim  of  his 
mediaeval  predecessor.  It  may  then  be  thought  that  the 
immediate  pressure  of  the  public  wants  has  led  to  this 
undue  complication  in  the  collection  of  taxation. 

Such,  however,  is  not  the  case.  There  is  no  doubt  an 
element  of  truth  in  the  assertion  that  it  was  want  of  funds 
that  led  to  the  creation  of  so  many  different  forms  of  taxa- 
tion. A  war  period  is  usually  a  time  of  financial  pressure,  and 
most  new  taxes  owe  their  introduction  to  occasions  of  this 
kind  2.  But  when  the  pressure  is  removed  and  the  work  of 
financial  reform  made  possible,  though  great  consolidations 
of  duties  are  effected,  there  is  no  example  of  recourse  to 
that  simple  method  that  appears  so  natural  and  appropriate 

1  A  dictum  credited  to  Sir  G.  C.  Lewis. 

2  The  war  period  (1793-1815)  affords  a  good  illustration  of  the  disposition 
to  impose  fresh  taxes,  Dowell,  ii.  208-245. 


310  PUBLIC    FINANCE.  [BOOK  III. 

in  the  light  of  some  elementary  principles.  It  is,  therefore, 
necessary  to  examine  the  grounds  on  which  a  multiple 
system  of  taxation  is  retained  notwithstanding  the  apparent 
advantages  of  the  single  tax  system. 

§  2.  In  the  face  of  the  general,  indeed  universal,  policy  of 
employing  diverse  forms  of  taxation,  there  has  been  at 
times  a  strong  disposition  on  the  part  of  students  of  Finance 
to  propose  some  particular  kind  that  should  tend  to  super- 
sede all  others  and  be  the  principal  resource  of  the  Ex- 
chequer. Prominent  among  these  plans  is  that  promul- 
gated by  the  famous  engineer  Vauban  in  his  Dime  Roy  ale. 
He  does  not,  as  has  been  sometimes  supposed,  advocate  the 
complete  abolition  of  all  other  charges.  Among  the  duties 
to  be  retained  were  a  moderate  salt  duty,  the  customs,  and 
some  of  the  taxes  on  acts :  but  the  tattle,  the  capitation,  the 
aides  (internal  duties  chiefly  on  drinks),  the  provincial 
customs  and  the  miscellaneous  sources  of  revenue  classed  as 
'  extraordinary '  were  to  give  place  to  a  single  tax — the 
'  Royal  tithe ' — imposed  on  the  product  of  land,  industry 
and,  in  short,  all  revenue,  its  amount  to  be  five  per  cent,  or 
ten  per  cent,  according  to  necessity  1.  His  contemporary 
Boisguillebert,  with  whom  he  had  so  close  an  intellectual 
affinity,  put  forward  the  same  idea  of  a  single  tax  of  one- 
tenth  of  the  product  of  land  and  industry. 

A  similar  tendency  is  shown  in  Sir  M.  Decker's  plan  (re- 
ferred to  and  criticised  by  Adam  Smith)  of  a  license  for  the 
consumption  of  commodities  as  a  substitute  for  the  excise 
and  customs,  a  scheme  which,  in  spite  of  its  obvious  diffi- 
culties, has  been  reproduced  in  a  modified  form  in  later 
times 2.  The  popularity  of  duties  on  consumption  favoured 

1  Vauban,  Dime  Roy  ale,  50-98.   A  remarkable  proposal  was  placed  before  the 
States-General  of  1577  at  Blois.    Besides  the  duties  whose  repeal  was  advocated 
by  Vauban,  the  salt  tax  and  the  customs  on  wine  were  to  be  removed,  and  a 
graduated   duty   on    households,   called    tattle   egalee  was   to   be   employed, 
Clamageran,  Histoire,  ii.  217-219. 

2  For  Adam  Smith's  criticism  see  Wealth  of  Nations,  371.     The  idea  of  a 
general   consumption   tax   was   defended   in   Revans,   A   Percentage    Tax  on 
J)omestic  Expenditure,  and  by  Pfeiffer,  Staatseinnahmen,  ii.  538-554. 


CHAP.  IV.]  THE   TAX   SYSTEM  I    ITS    FORMS.  31 1 

the  growth  of  plans  like  this.  Still  more  significant  was 
Vanderlint's  scheme  for  a  single  tax  on  land  and  its  pro- 
ducts, perhaps  suggested  by  some  remarks  of  Locke.  The 
pamphlet,  in  which  Vanderlint  stated  his  plan,  is  a  distinct 
anticipation  of  the  physiocratic  idea  as  to  the  true  syste 
of  taxation  1. 

§  3.  The  proposals  already  described  came  from  individual 
thinkers,  and  had  little  or  no  influence  on  competent  opinion 
or  on  financial  practice.  But  in  the  circle  of  economists, 
who  regarded  Quesnay  as  their  master,  the  dogma  of  a 
single  tax — the  Impot  unique — became  an  accepted  article 
of  belief.  This  doctrine  was  the  natural  result  of  their 
theory  as  to  the  limits  of  net  produce.  The  rent  of  land 
was,  they  thought,  the  only  '  source '  of  taxation,  and  it 
was  therefore  convenient  that  it  should  be  its  only  c  object.' 
Vauban's  idea  of  a  Royal  tithe  was  good  so  far  as  simplicity 
went,  but  it  was  unequal 2,  inasmuch  as  it  fell  on  capital 
employed  in  cultivation  which,  in  the  physiocratic  dialect, 
was  not  ( disposable.'  In  the  application  of  their  principles 
the  Physiocrats  were  more  inclined  than  is  sometimes 
believed  to  admit  modifications.  The  elder  Mirabeau  was 
prepared  to  raise  two-thirds  of  the  requisite  revenue  by  an 
income  tax,  leaving  only  one-third  for  the  land  tax,  and 
Turgot  frankly  concedes  that  the  time  had  not  come  for 
an  abolition  of  octrois*. 

Besides  the  plan  of  a  single  tax  on  land  rent,  which  has 
recently  received  support  on  different  ground  from  that  of 
its  originators,  other  forms  of  single  taxation  have  been 
suggested  in  the  present  century.  One  is  the  general 
income  tax,  which  would  directly  attack  the  normal  source 

1  Vanderlint's  Money  answers  all  Things  appeared  in  1734.  See  Ricca- 
Salerno,  Dot  trine  Finanziarie  in  IngJiilterra,  23-26. 

3  See  Turgot's  advocacy  of  the  single  tax  on  land.  He  declares  :  (  Cette 
proposition  est  contraire  a  1'opinion  de  ceux  qui  avaient  con9u  le  systeme  de  la 
dime  royale  .  .  .  Ce  systeme  peut  effectivement  eblouir  par  sa  simplicite,  par  la 
facilite  du  recouvremcnt,  par  1'apparence  de  la  justice  distributive.  ...  II  peche 
cependant  par  differents  inconvenients,'  i.  404. 

:;  Mirabeau,  Thcorie  de  V Impot,  316 ;  Turgot,  ii.  114. 


312  PUBLIC    FINANCE.  [BOOK  III. 

of  taxation,  and  secure  whatever  adjustment  seemed  de- 
sirable to  the  legislator.  In  the  form  suggested  by  some 
economists  it  would  be  proportional  to  receipts,  and  might 
be  so  framed  as  to  cover  acquisitions  by  gift  or  inheritance1. 
Radical  democrats  would  prefer  that  the  single  tax  on 
incomes  should  be  more  or  less  rapidly  progressive. 

The  plan  of  a  single  tax  on  '  realized  property  '  has  also 
received  much  support.  It  would  be  confined  to  property 
not  engaged  in  production  '  as  land,  the  public  funds,  money 
lent  on  mortgage,  and  shares, in  joint-stock  com- 
panies ' 2,  and  was  believed  by  its  advocates  to  escape  the 
inequalities  of  the  income  tax,  and  to  present  greater 
facilities  for  collection,  since  the  objects  of  assessment  would 
be  definite  and  open  to  observation. 

Of  rather  wider  scope  is  the  plan  for  a  single  tax  on  capi- 
tal, put  forward  by  De  Girardin  and  Menier,  and  approved 
by  M.  Guyot.  Under  it  taxation  is  to  'be  imposed  on 
'  fixed  '  capital,  i.  e.  on  '  all  such  utilities  as  yield  their  pro- 
ducts without  changing  their  nature,'  to  wit,  *  land,  mines, 
buildings,  machinery,  implements,  ships,  carriages,  animals 
employed  productively,  furniture,  and  works  of  art  V  Raw 
materials  and  goods  for  sale  would  be  exempt  from  charge. 
The  basis  of  assessment  proposed  is  the  selling  value  of  the 
taxable  capital,  one  per  cent,  of  which  was  believed  by 
Menier  to  be  sufficient  in  the  case  of  France  to  meet  the 
public  expenditure. 

§  4.  These  several  plans  have  certain  elements  in  common 
and  appeal  to  the  very  natural  desire  to  secure  a  simple  and 
inexpensive  form  of  taxation.  Were  there  no  obstacles  in 
the  way  it  is  plain  that  direct  imposition  on  .the  source  of 
taxation  would  be  preferable  to  the  complicated  methods 
actually  employed.  The  cost  of  collection  would  be 
materially  diminished,  and  the  immediate  incidence  on  the 

1  An  ingenious  plan  of  this  kind  was  proposed  by  W.  N.  Hancock  under  the 
title  of  '  A  perfect  Income  Tax.'  *  Mill,  Principles,  Bk.  v.  ch.  2.  §  3. 

3  Guyot,  Vlmpdt  sur  le  Revenu,  222.  See  Menier' s  various  works,  espe- 
cially his  UAvenir  Economique. 


CHAP.  IV.]  THE   TAX   SYSTEM  I    ITS    FORMS.  313 

several  individuals  and  classes  precisely  determined.  More- 
over, the  society,  as  distinct  from  the  State,  would  gain  by 
the  removal  of  restraints  on  industry,  and  it  could  measure 
definitely  the  cost  of  the  public  services. 

Against  such  plain  and  obvious  advantages  there  are\ 
weighty  considerations  to  be  set,  which  militate  against  the 
adoption  of  the  single  tax  in  any  form,  (i)  The  danger  of  a 
single  tax,  no  matter  how  skilfully  estimated  not  being  duly 
proportioned  to  revenue  is  a  serious  one  to  which  any  other 
proposed  base,  e.  g.  capital  or  expenditure,  is  equally  open. 
With  a  combination  of  different  taxes  the  errors  in  any  one 
case  will  be  small,  and  probably  compensated  by  the  opera- 
tion of  other  taxes,  but  with  a  single  tax  there  is  no  pos- 
sible room  for  correction.  Experience  shows  that  what  is 
in  appearance  a  perfectly  fair  tax  may  be  practically  very 
unequal  in  its  operation.  Evasions  and  false  returns  destroy 
the  proportionality  of  the  best  arranged  income  tax.  (2) 
The  pressure  of  taxation  in  most  modern  States  is  by  no 
means  a  slight  one.  On  the  average  it  exceeds  ten  per 
cent,  of  the  national  revenue.  Now  it  is  evident  that  '  the 
ignorant  impatience  of  taxation '  would  prevent  this  amount 
being  raised  without  much  irritation  through  any  single  tax. 
To  disguise  the  burden  is,  so  far  as  sacrifice  is  concerned,  to 
reduce  it,  and  the  breaking  up  of  the  system  into  several 
distinct  forms  undoubtedly  has  this  advantage.  (3)  The 
use  of  a  single  tax  would  remove  the  advantage  that  is 
obtained  at  present  by  reaching  the  different  forms  of 
taxable  capacity.  Consumption,  income  as  stated,  property 
inherited  are  all  so  many  indications  of  the  capacity  arising 
from  the  possession  of  revenue,  which,  when  duly  considered 
enable  a  better  proportional  rate  of  taxation  to  be  main- 
tained. Besides,  in  certain  cases  it  is,  as  we  saw,  necessary 
to  separate  the  tax-payer's  contributions  and  treat  some  as 
given  for  special  service,  or  to  assign  the  total  amount 
between  different  countries  and  districts.  A  single  tax 
would  fail  altogether  in  this  respect.  (4)  It  is,  moreover,  im- 
portant to  note  that  a  so-called  single  tax  is  not  so  in  reality. 


314  PUBLIC    FINANCE.  [BOOK  III. 

Thus  a  general  income  tax  is  nothing  but  a  combination  of 
several  special  taxes,  and  may  often  prove  just  as  trouble- 
some and  complex.  A  tax  on  fixed  capital  would  be  in 
fact  a  tax  on  land,  mines,  factories,  furniture,  works  of  art, 
&c.,  which  would  be  so  many  separate  categories  for  dis- 
tinct assessment.  A  general  tax  on  consumption  or  ex- 
penditure would  be  even  more  involved.  The  simplicity  of 
such  plans  is  therefore  often  only  apparent,  and  covers  a 
real  complexity.  (5)  The  results  of  the  shifting  of  taxation 
increase  the  force  of  the  preceding  argument.  A  propor- 
tional tax  in  assessment  may,  in  the  ultimate  incidence, 
be  a  very  one-sided  charge.  Taxation  in  the  simplest  shape 
introduces  a  complicating  element  into  the  economic  system 
the  effects  of  which  are  hard  to  follow  and  often  very  far 
removed  from  what  first  appearances  would  suggest. 

§  5.  The  foregoing  considerations  and  actual  fiscal  practice 
have  given  countenance  to  the  directly  opposite  doctrine 
which  has  been  perhaps  most  precisely  enunciated  by 
Arthur  Young.  'The  mere  circumstance  of  taxes  being 
very  numerous,  in  order  to  raise  a  given  sum,  is  a  con- 
siderable step  towards  equality  in  the  burden  falling  on  the 
people  ;  if  I  was  to  define  a  good  system  of  taxation,  it 
should  be  that  of  bearing  lightly  on  an  infinite  number  of 
points,  heavily  on  none.  In  other  words  that  simplicity  in 
taxation  is  the  greatest  additional  weight  that  can  be  given 
to  taxes,  and  ought  in  every  country  to  be  most  sedulously 
avoided  V  This  passage  has  at  least  the  merit  of  placing 
the  issue  in  a  clear  and  definite  form.  To  attain  equality 
in  distribution  there  ought  on  this  theory  to  be  an  almost 
universal  system  of  taxation  touching  the  people  at  every 
point.  Property,  income,  consumption,  transactions,  in- 
heritance should  all  be  moderately  taxed  to  make  the 
burden  as  even  and  as  light  as  possible.  Young's  views 
were,  beyond  question,  produced  by  repulsion  from  those 
of  the  Physiocrats,  and  went  even  farther  in  the  opposite 

1  Political  Arithmetic.     A  statement  quoted  with  approval  by  Sir  G.  Lewis. 
Northcote,  Financial  Policy,  309. 


CHAP.  IV.]  THE   TAX   SYSTEM  I    ITS    FORMS.  315 

extreme,  but  they  do  not  inaccurately  describe  the  cha- 
racteristic feature  of  the  Finance  of  the  eighteenth  century. 
As  a  standard  for  modern  times  they  are  evidently  inappli- 
cable and  opposed  to  the  most  important  and  valuable, 
reforms  of  the  present  century.  To  secure  the  placing  of 
pressure  '  on  an  infinite  number  of  points  '  would  require  the 
interference  of  the  revenue  authorities  in  most  of  the  indus- 
trial processes  and  the  private  life  of  the  community.  Taxes 
on  all  commodities,  on  transfers  of  goods,  and  on  the 
different  forms  of  production  would  be  extremely  pre- 
judicial to  the  development  of  industry,  irksome  and  incon- 
venient to  the  payers,  and  very  costly  in  collection. 
Financial  history  affords  abundant  examples  of  these  evils. 
The  Alcavala,  or  duty  on  all  sales,  has  been  regarded  by 
Adam  Smith  as  the  cause  of  the  ruin  of  agriculture  and 
manufactures  in  Spain 2.  The  English  customs  before  the 
first  reforms  of  Huskisson  exemplified  the  evils  of  undue 
multiplicity  in  one  branch  of  taxation,  and  the  United 
States  revenue  system  during  the  Civil  War  was  an  even 
more  striking  instance  of  the  same  defect 2.  To  properly 
arrange  and  combine  a  great  number  of  duties  is  too  diffi- 
cult a  task  to  impose  on  administrators,  who  are  sure  even 
with  the  utmost  care  to  inflict  much  injustice  and  cause 
heavy  losses. 

§  6.  The  defects  of  the  opposed  systems  of  single  and  of 
multiple  taxation  tend  to  countenance  what  has  been  called 
'  plural  taxation,'  in  which  the  revenue  is  not  on  the  one 
hand  collected  by  a  single  form  of  duty,  nor,  on  the  other, 
divided  into  a  great  number  of  trifling  charges.  Under  the 
existing  conditions  of  society  this  is  the  course  that  has  most 
in  its  favour  as  being  at  once  the  most  productive,  least  in- 
convenient, and  on  the  whole  approaching  nearest  to  justice. 
But  it  is  necessary  to  remark  that  this  conclusion  is  limited 

1  Wealth  of  Nations,  381. 

2  For  the  English  tariff,  Dowell,  ii.  249-261  ;  Buxton,  Finance  and  Politics, 
i.  18,  19.     For  the  United  States,  Wells  in  Cobden  Club  Essays  (2nd  series), 
479- 


316  PUBLIC    FINANCE.  [BOOK  III. 

to  present  circumstances.  It  does  not  follow  that  it  may  not 
be  possible  at  some  future  time  to  adopt  a  single  tax  system, 
or  at  least  a  very  close  approach  to  it.  Among  the  argu- 
ments urged  against  the  single  tax  is  the  actual  wejgkt  of 
taxation  and  the  risk  of  exciting  discontent  by  raising  the 
required  sum  in  a  single  payment.  Suppose,  however,  that 
public  expenditure  were  greatly  reduced,  so  that  instead  of 
eight,  ten,  or  fifteen  per  cent,  of  national  revenue,  only 
three  or  four  per  cent,  were  required  ;  it  might  well  be  that 
the  relief  to  industry  and  the  facility  of  collection  would 
make  an  income  tax  advisable  as  the  sole  agent  for  raising 
revenue.  So  large  a  reduction  of  expenditure  is  not  to  be 
expected.  When  dealing  with  that  part  of  our  subject  we 
saw  that  the  tendency  was  towards  increase,  but  it  is  not 
difficult  to  conceive  how  a  very  different  state  of  things 
might  have  come  into  being.  Let  us  suppose  that  Eng- 
land had  never  engaged  in  the  Revolutionary  and  Napo- 
leonic wars,  and  that  her  foreign  policy  had  been  for  the 
past  century  that  of  rigid  '  non-intervention,'  the  financial 
results  would  certainly  be  (i)  the  entire  removal  of  the 
national  debt  with  its  charge  of  £25,000,000  and  whatever 
surplus  may  actually  exist ;  and  (2)  the  reduction  of  the 
army  and  navy  estimates  to  less  than  one  half  of  their 
present  figure.  Moderate  reductions  in  the  Civil  Service 
would  allow  of  a  curtailment  of  expenditure  to  the  amount  of 
at  least  £50,000,000,  leaving  in  round  numbers  £25,000,000 
to  be  provided  by  taxation.  An  income  tax  of  gd.  in  the 
pound  (including  as  it  should  the  smaller  incomes  now 
exempt)  would  be  the  most  direct  mode  of  procuring  that 
sum.  The  position  of  the  United  States,  if  the  Civil  War 
had  been  obviated  by  prudent  statesmanship,  would  be 
even  more  favourable.  A  very  moderate  income  tax  would 
have  met  all  the  expenditure  of  the  years  1850-1860,  as  the 
low  customs  duties  actually  did  1. 

It  thus  appears  that  the  form  of  taxation  depends  in  a 
great  degree  on  the  amount  of  expenditure.     With  modera- 

1  Cp.  Leroy  Beaulieu,  i.  179-185. 


CHAP.  IV.]  THE   TAX   SYSTEM  :    ITS   FORMS.  317 

tion  in  outlay  it  is  possible  to  have  simplicity  in  taxation, 
and  the  difficulties  of  the  problem  of  expenditure,  already 
hard  enough,  are  increased  by  the  need  of  weighing  the^ 
greater  difficulties  of  heavy  taxation.  It  is  eminently  true 
that  wise  policy  is  essential  for  sound  Finance l. 

§  7.  Financial  necessity  makes  the  retention  of  different 
forms  of  taxation,  if  not  an  absolute  necessity,  at  all  events 
advisable  both  in  the  interests  of  the  State  and  of  the 
payers.  And  this  being  so  we  have  next  to  examine  the 
comparative  merits  of  the  different  forms  in  use.  The  first 
broad  distinction — that  between  direct  and  indirect  taxes  — 
has  some  connexion  with  the  controversy  as  to  single  against 
multiple  taxation.  The  most  popular  forms  of  the  single  tax 
are  direct,  while  most  of  the  charges  in  .a  multiple  system 
are  indirect.  There  has  been  accordingly  a  not  unnatural 
tendency  to  confuse  the  two  separate  issues  by  identifying 
single  with  direct  and  multiple  with  indirect  taxation.  The 
confusion  is  helped  by  the  fact  that  the  great  advocates  of 
the  single  land  tax  laid  particular  stress  on  its  being  direct. 
•  The  essential  form  of  taxation,'  says  De  La  Riviere,  *  con- 
sists in  taking  taxation  directly  where  it  is,  and  not  wishing 
to  take  it  where  it  is  not.  .  .  .  To  change  that  direct  form  of 
taxation  in  order  to  give  it  an  indirect  one  is  to  reverse  a 
natural  order  from  which  we  cannot  depart  without  the 
greatest  inconvenience ' 2.  The  idea  that  taxation  should 
not  lead  to  shifting  and  repercussion  was  one  of  the  strong 
points  of  his  school.  The  original  conception  of  direct 
taxation  as  being  that  which  is  imposed  immediately  on  the 
ultimate  source  from  which  it  comes  was,  as  we  saw,  altered 
for  administrative  convenience,  and  applied  to  cases  where 
recurring  payments  were  made  and  lists  of  tax-payers 
kept3.  But  this  use  of  the  term,  whatever  its  technical 
advantages,  obscures  the  broad  line  of  division  that  the 

1  Cp.  the  well-known  saying  of  Baron  Louis,  '  Faites-moi  de  bonne  politiq;t: 
et  je  vous  ferai  de  bonnes  finances? 

2  Physiocrates,  474.     The  italics  'are  in'the  original. 

3  See  Bk.  iii.  ch.  I.  §  8. 


318  PUBLIC    FINANCE.  [BOOK  III. 

older  meaning  gave,  and  which  really  possesses  so  much 
scientific  importance.  Whether  a  duty  is  assessed  directly 
on  the  ultimate  bearer  or  is  passed  through  various  inter- 
mediaries before  reaching  him,  may  not  be  capable  of  being 
precisely  known  in  all  cases.  There  are  no  hard  and  fast 
lines  in  fact,  and  the  instances  on  the  margin  may  be 
numerous,  but  if  we  take  the  terms,  not  as  giving  a  com- 
plete classification  of  taxes,  but  as  marking  the  presence  or 
absence  of  a  certain  characteristic,  they  may  be  employed 
with  advantage,  but  rather  to  suggest  reasons  for  dis- 
crimination than  to  definitely  settle  results A. 

The  expressions  *  direct '  and  '  indirect '  have  received  a 
further  alteration  which  makes  it  more  difficult  to  employ 
them  without  careful  explanation.  Taxes  on  property  and 
income  form  a  very  large  part  of  the  direct  taxes ;  those 
on  commodities  collected  from  the  producer  or  dealer  an 
equally  large  part  of  the  indirect  ones.  These  are,  besides, 
the  special  forms  of  the  two  kinds  of  taxation  that  are 
usually  selected  as  types  in  discussions  about  them,  so  that 
it  is  not  difficult  to  understand  how  the  comparisons 
between  direct  and  indirect  taxation  have  become  for  the 
most  part  an  inquiry  into  the  relative  merits  of  taxes  on 
income  and  property  as  against  taxes  on  commodities. 

This  employment  of  the  terms  is  supported  by  the 
distinct  origin  of  the  two  forms.  '  Taxes '  on  property  and 
persons  (Steuern)  present  a  marked  contrast  to  the  '  duties ' 
on  goods  and  commerce  (Abgaben  und  Auflagen\  and 
especially  in  the  fact  that  the  former  were  direct,  the  latter 
indirect.  A  feeling  of  this  original  separation  is  at  the 


1  'The  classification  of  taxes  as  direct  and  indirect  it  may  be  as  well  to 
premise  has  been  objected  to  on  the  ground  that  it  cannot  be  consistently 
applied.  .  .  .  But  this  objection  applies  only  to  the  wording  of  the  ordinary 
definition  of  direct  and  indirect  taxes,  and  we  may  safely  continue  to  employ 
the  terms  to  denote  the  radical  distinction  intended  ;  namely  between  taxes  on 
the  one  hand  levied  either  directly  from  the  contributors  themselves  or  from 
funds  on  the  way  to  them  ;  and  taxes  on  the  other  hand  on  producers  or 
dealers  in  the  intention  that  they  shall  recover  them  in  the  prices  finally  paid 
by  consumers/  Cliffe  Leslie,  in  Cobden  Club  Essays  (2nd  series),  192. 


CHAP.  IV.]  THE   TAX   SYSTEM  I    ITS    FORMS.  319 

root  of  much  of  the  discussions  on  the  merits  of  the  two 
classes  and  helps  to  make  the  issue  more  obscure1. 

Still  the  contrast  between  the  two  groups  of  taxes  that 
are  usually  regarded  as  being  direct  and  indirect,  quite\ 
apart  from  the  question  of  incidence,  has  a  sufficient  value 
to  make  it  convenient  in  estimating  the  merits  of  a  given 
system.  The  peculiarities  of  the  separate  taxes  that  a 
more  scientific  arrangement  exhibits  may  fitly  be  treated 
in  dealing  with  particular  taxation,  but  the  broad  general 
separation  that  is  so  familiar  in  financial  discussion  serves 
better  for  the  purpose  of  showing  the  requisite  conditions 
of  taxation  as  a  whole. 

§  8.  Starting,  then,  with  the  conception  of  direct  taxes 
as  those  levied  immediately  on  the  '  subjects,'  and  therefore 
embracing  taxes  on  income  and  property,  or  on  their  com- 
ponent parts,  in  opposition  to  duties  on  commodities  and 
on  exchange,  where  there  is  a  shifting  of  the  burden  from 
the  immediate  payer  to  the  subject  which  justifies  the  name 
of  '  indirect,'  we  have  to  consider  the  merits  and  defects 
of  each  class,  and  the  most  desirable  mode  of  combining 
them. 

At  the  outset  the  advantages  of  direct  taxation  seem  to 
predominate.  As  income  is  the  ultimate  source  of  taxation 
its  immediate  imposition  is  the  most  obvious  and  rational 
way  of  claiming  a  share  in  the  produce  for  the  State.  The 
taxes  on  the  different  components  of  income  have  the  same 
merit.  Rent,  interest,  and  earnings,  are  the  natural  objects 
on  which  to  place  the  charges  of  the  State.  Where  it  is 
thought  desirable  on  grounds  of  justice  to  tax  property,,  the 
direct  mode  of  doing  so  seems  the  simplest  and  least  in- 
volved. As  a  single  tax  appears  better  than  a  multiple 
system  so  does  direct  taxation  seem  superior  to  indirect, 
and  for  much  the  same  reasons.  There  is  the  greater 
facility  and  lower  cost  of  collection,  and  the  power  of 
knowing  the  exact  amount  paid  by  each  person  liable. 
The  drawbacks  are  also  of  the  same  kind.  The  greater 

1  See  Dowell,  Hist,  of  Taxation,  Pref.  xii. ;  Vocke,  Abgaben,  1-6. 


32O  PUBLIC    FINANCE.  [BOOK  III. 

dislike  to  direct  levies  of  taxation  is  notorious  ;  the  demand 
for  payment  is  more  disagreeable  than  the  fact  of  paying, 
as  it  brings  home  the  existence  of  the  charge  without  any 
possibility  of  escaping  notice.  Formerly  financiers  were 
too  anxious  to  escape  popular  resentment  to  have  recourse 
to  this  form  unless  in  extremities,  and  in  modern  days 
taxation  must  be  suited  to  the  taste  of  the  voters.  Another 
difficulty  is  the  necessity  of  assessment  in  all  direct 
taxes.  If  imposed  on  income,  on  property,  or  on  any 
separate  part  of  produce,  there  must  be  a  valuation  of 
the  object  which  is  charged,  affording  opportunities  for 
evasion  and  for  arbitrary  official  action.  It  is  true  that  the 
progress  of  society  may  be  expected  to  reduce  these 
objections.  As  acquaintance  with  the  operation  of  taxation 
becomes  greater  the  payers  form  a  juster  estimate  of  the 
amount  that  they  pay,  and  will  feel  that  direct  levy  is  really 
no  worse  than  taxation  through  the  enhanced  price  of 
commodities. 

Moral  progress  may  also  diminish  the  disposition  to 
evade  payment  by  creating  a  higher  standard  of  social  duty, 
and  the  better  organization  of  the  financial  service  will 
limit  the  risk  of  undue  official  pressure.  Still  these  evils 
actually  exist,  and  the  extent  to  which  they  are  likely  to 
occur  must  limit  the  employment  of  direct  taxation 1. 
Again,  under  a  system  of  pure  direct  taxation  it  is  very  diffi- 
cult to  obtain  their  due  proportion  from  the  poorer  members 
of  society.  The  attempt  to  carry  the  income  tax  at  a  high 
rate  down  to  the  lower  incomes  now  exempt  would  be  both 
costly  and  irritating,  and  the  only  produce  tax  that  would 
much  affect  them — that  on  wages — would  be  still  more 
obnoxious.  No  doubt  with  moderate  expenditure  and  an 
improved  standard  of  social  morals  the  difficulty  would  be- 
come manageable,  but  we  cannot  assume  the  existence  of 
these  favouring  conditions  without  adequate  proof2. 

1  Cp.  Vocke's  remarks,  Abgaben,  624-5.  ' 

2  See  Cliffe  Leslie's  forcible  argument  in  Cobden  Club  Essays  (and  series), 
252  sq.- 


CHAP.  IV.]  THE   TAX   SYSTEM  :    ITS    FORMS.  321 

It  is  moreover  alleged  that  direct  taxation  is  inexpansive, 
in  that  it  does  not  grow  in  proportion  to  the  increase  of 
national  wealth.  This,  however,  is  not  altogether  correct,  and 
so  far  as  it  is  true  can  be  accounted  for  without  difficulty^ 
The  growth  of  so  important  a  direct  tax  as  the  English 
income  tax  since  its  re-establishment  in  1842  has  been  very 
remarkable.  The  yield  per  penny  for  the  first  year  was  only 
£730,000  ;  in  1890-91  it  reached  £2,200,000,  or  a  three- 
fold increase1  in  less  than  fifty  years.  Indeed  the  only 
explanation  that  can  be  given  of  a  lower  increase  in  an 
income  tax  than  in  income  is  that  of  evasion  by  the 
payers,  an  objection  already  considered.  But  in  fact  there 
are  special  reasons  for  the  slow  growth  of  certain  direct 
taxes.  A  tax  on  rent  will  not  increase  in  proportion  to 
the  growth  of  income,  as  it  is  generally  fixed  for  a  period  of 
some  length.  The  French  land  tax  cannot  increase  since 
it  is  apportioned  and  therefore  fixed  in  amount,  and  in  all 
cases  of  valuation  it  is  not  easy  to  keep  the  assessments  up 
to  the  actual  gains2.  The  counter-advantage  that,  in  a 
progressive  society,  these  taxes  tend  to  become  lighter 
while  yielding  a  definite  amount  ought  not  to  be  over- 
looked. It  is  a  benefit  to  have  one  part  of  the  revenue 
that  can  be  depended  on,  even  in  times  of  crisis.  Taking 
the  defects  and  merits  together  we  may  believe  that  direct 
taxation  ought  to  be  a  part  of  every  modern  financial 
system,  and  that  the  extent  to  which  it  can  be  carried  will 
depend  on  the  particular  conditions. 

§  9.  The  weak  points  of  direct  taxation  are  the  strength 
of  the  opposed  form.  Indirect  taxes  are  not  felt  by  the 
payer  in  the  same  degree,  and  therefore  cause  him  less 
annoyance.  A  tax  mixed  up  in  the  price  of  wine,  tea  or 
tobacco,  is  not  brought  so  clearly  to  his  mind  :  it  seems  to 
be  a  part  of  the  expenses  of  production  and  to  be  due  to 

1  Ireland  was  not  included  till  1853,  but  the  abatement  limit  was  raised, 
which  probably  compensated  for  this  addition. 

2  E.g.  in  Ireland  Schedules  A  and  B  of  the  income  tax  so  far  as  land  is 
concerned  are  taken  on  a  fixed  valuation,  and  therefore  cannot  expand. 

Y 


322  PUBLIC    FINANCE.  [BOOK  III. 

purely  economic  causes.  If  '  the  best  tax  is  that  whose 
forms  most  effectually  disguise  its  nature ' l  there  can  be 
no  doubt  of  the  superior  merit  of  indirect  ones.  A  second 
advantage  is  the  facility  that  they  supply  for  taxing  the 
smaller  contributors.  Duties  on  articles  of  general  con- 
sumption touch  all  classes,  though  if  necessaries  are  exempt 
they  leave  the  minimum  of  subsistence  unaffected,  but  only 
on  the  condition  that  the  minimum  revenue  is  confined  to 
that  object.  Thirdly,  they  are  both  productive,  and  in 
times  of  prosperity  elastic  without  undue  pressure.  The 
growth  of  the  English  excise  and  customs,  in  spite  of 
great  reductions,  has  been  remarkable.  Again  it  has  been 
often  pointed  out,  that  taxes  on  commodities  are  collected 
at  a  convenient  time,  since  the  contributor  '  pays  them  by 
little  and  little  as  he  has  occasion  to  buy  the  goods  ...  he 
is  at  liberty  too  to  buy  or  not  to  buy,  as  he  pleases  V  This 
remark  of  Adam  Smith's  has  been  extended  to  the  asser- 
tion that  indirect  taxation  is  preferable  as  being  'voluntary.' 
There  is  no  necessity  to  pay  unless  the  tax-payer  is 
willing.  This,  if  true,  would  be  a  disadvantage,  but,  as 
Mill  h'as  shown 3,  it  is  an  obvious  fallacy.  A  citizen  can 
escape  a  wine  duty  by  not  consuming  wine.  That  course, 
however,  has  the  double  disadvantage  of  depriving  the  State 
of  revenue  and  of  diminishing  his  own  enjoyment.  In  the 
case  of  a  direct  tax  of  equal  amount  the  same  saving  would 
be  made  by  giving  up  the  use  of  wine,  by  which  the 
revenue  would  not  suffer.  This  possibility  of  checking 
consumption  is  a  bad,  instead  of  a  good,  feature  in  taxes  on 
commodities.  Other  defects  are  easily  discoverable.  The 
rule  of  equality  appears  to  be  frequently  violated.  Articles 
of  general  consumption  are  used  in  much  larger  proportion 
by  the  poor  than  by  the  rich,  so  that  in  any  modern  fiscal 
system  the  pressure  of  direct  taxation  comes  chiefly  on 
the  working  classes.  Expedients  may  be  suggested  to 
diminish,  this  evil.  Articles  of  luxury,  may  be  subjected  to 

1  Gaudin;  cp.  De  Parieu,  i.  121.  2  Wealth  of  Nations,  348. 

3  Principles,  Bk.  v.  ch.  6.  §  I. 


CHAP.  IV.]  THE   TAX   SYSTEM  :    ITS   FORMS.  323 

heavy  taxation,  and  the  rates  of  duty  may  be  fixed  accord- 
ing to  the  quality  of  the  articles  taxed.  Such  measures, 
however,  give  rise  to  further  difficulties.  Duties  ad  valorem 
lead  to  evasion,  and  articles  of  luxury  are  easily  smugglea\ 
In  spite  of  any  possible  alleviations  the  remaining  inequality 
must  be  considerable.  The  elasticity  of  indirect  taxes  has 
its  unfavourable  side.  At  times  of  depression  their  yield 
cannot  be  relied  on  ;  as  they  grow  in  prosperous  years  so 
do  they  shrink  in  bad  ones.  Nor  are  they  easily  extended. 
Increased  duties  may  possibly  give  stationary  or  even 
diminished  receipts x.  Reliance  on  indirect  taxation  alone 
will  therefore  sooner  or  later  cause  financial  embarrassment. 

Expenses  of  collection  are  probably  somewhat  larger  in 
the  case  of  indirect  taxes,  though  the  difference  is  not  so 
great  as  is  often  asserted.  The  cost  of  collection  of  the 
English  Inland  Revenue  (about  one-half  of  which  is  direct) 
is  less  than  that  of  the  customs,  but  so  much  depends 
on  special  conditions  and  the  amount  of  revenue  to  be 
raised,  that  a  general  conclusion  on  the  subject  would  be 
misleading. 

By  far  the  most  formidable  objection  to  the  indirect 
taxation  of  commodities  is  the  loss  to  the  society  through 
disturbance  of  industry.  The  evils  of  both  customs  and 
excises  in  this  respect  have  been  forcibly  shown  by  Cliffe 
Leslie2.  The  former  close  some  ports  altogether  on  the 
ground  that  there  is  not  trade  sufficient  to  justify  the  ex- 
pense of  maintaining  custom  houses  at  them,  and  limit  the 
imports  of  taxed  articles  at  others.  Towns  without  bonded 
warehouses  are  at  a  disadvantage  in  competing  with  those 
who  possess  them.  Industries  are  either  prevented  from 
coming  into  being,  or  have  their  development  retarded  by 
such  regulations  and  restrictions.  The  excise  system  is 
injurious  to  the  industries  under  its  supervision,  as  it 

1  The  increase  of  duties  in  1840  by  Baring  is  an  instance;  5  percent,  extra 
all  round  did  not  give  increased  receipts,  Dowell,  ii.  313. 

2  '  Financial  Reform,'  in   Cobden  Club  Essays  (2nd  series),  189-263  ;  also 
reprinted  separately. 

Y  2 


324  PUBLIC    FINANCE.  [BOOK  III. 

controls  the  processes  to  be  employed,  and  hinders  the 
introduction  of  improvements.  Routine  is  necessary  for  / 
effectual  regulation,  but  it  is  fatal  to  the  spirit  of  enter-  / 
prise  that  is  the  cause  of  industrial  advance.  The  various 
items  of  this  indictment  are  supported  by  specific  alle- 
gations 1,  and  there  can  be  no  dispute  as  to  the  gravity  of 
the  issue  raised,  and  as  to  the  existence  of  the  grievances 
stated.  None  the  less  are  we  compelled  to  hold  that  the 
retention  of  taxation  on  commodities  is  at  present  a  neces- 
sity in  most  societies,  and  that  by  judicious  measures  it  is 
possible,  not  indeed  to  remove,  but  to  reduce  the  evils  com- 
plained of.  There  are  considerations  other  than  those 
noticed  by  the  assailants  of  these  duties.  All  taxation  is, 
it  must  be  remembered,  evil  in  its  deduction  of  wealth  and 
in  the  restrictive  measures  that  must  be  used  to  make  it 
effective.  Direct  taxation  has  its  own  inequalities  and  in- 
justices, and  is,  besides,  often  vexatious  and  inquisitorial. 
A  presentation  of  the  faults  of  one  particular  form  of  tax- 
revenue  is  impressive,  but  should  be  qualified  by  considering 
the  difficulties  of  any  alternative  method.  In  Economics 
and  Finance  we  must  be  on  our  guard  against  the  '  fallacy  of 
objections.'  Again,  it  is  not  clear  that  the  taxation  of  a 
small  number  of  articles  has  the  very  serious  influence 
ascribed  to  it.  Most  of  the  instances  of  interference  with 
processes  are  taken  from  cases  that  no  longer  exist.  The 
duties  on  salt,  glass,  and  sugar,  may  have  hampered  inven- 
tion, but  they  are  things  of  the  past.  Apart  from 
intoxicating  drinks  and  tobacco  the  industry  of  the  United 
Kingdom  may  be  said  to  be  free  from  control  for  fiscal 
purposes.  A  further  point  may  be  noticed.  The  customs 
staff  is  not  purely  a  revenue  agency ;  inspection  and  super- 
vision of  the  shipping  industry  is,  or  is  generally  assumed 
to  be,  needed  for  sanitary  and  police  reasons.  It  is  but  one 
part  of  the  system  described  in  an  earlier  chapter 2,  and  its 
whole  cost  should  not  be  ascribed  to  the  need  of  revenue. 

1  Leslie,  ut  supra,  204,  205,  207-8,  219,  225-231. 
a  Bk.  i.  ch.  4,  *  Administrative  Supervision.' 


CHAP.  IV.]  THE   TAX   SYSTEM  :    ITS   FORMS.  325 

So  far  as  the  duties  on  stimulants  seek  to  repress  consump- 
tion, whatever  hindrances  they  cause  to  the  industry  cannot 
be  looked  on  as  evil,  since  they  conduce  towards  the  object 
aimed  at.  The  value  of  industrial  liberty  is  doubtless  great. 
What  represses  or  diverts  the  economic  forces  that  tend  to 
increased  production  of  wealth  should  not  be  allowed  with- 
out adequate  reason,  and  should  be  carefully  watched  ;  but 
on  striking  a  balance  it  seems  that  the  advantages  outweigh 
the  evils  wherever  a  large  revenue  has  to  be  obtained,  and 
where  the  system  of  indirect  taxation  is  kept  within  narrow 
limits. 

§  10.  On  the  borderland  between  direct  and  indirect  taxa- 
tion lies  a  large  class,  or  rather  several  classes,  of  taxes  such 
as  those  on  transfers  of  property,  on  ordinary  contracts,  on 
communication  and  transport,  and  in  short  the  numerous 
charges  on  acts.  All  of  them  belong  to  the  category  of 
indirect  taxes  in  the  administrative  sense  as  do  most  of 
them  in  any  sense  of  the  term.  They  stand  on  somewhat 
different  ground  from  duties  on  commodities,  inasmuch  as 
they  sometimes  approximate  to  fees  for  special  services 
rendered,  and  in  others  are  directly  levied  from  the  ulti- 
mate payers.  They  do  not  so  much  interfere  with  industry 
as  with  commerce  in  the  strict  sense,  but  they  are  open  to 
the  same  kind  of  objections  as  those  urged  against  the 
taxation  of  commodities.  To  hamper  exchange  is  to  pre- 
vent the  passage  of  productive  agents  into  suitable  hands  : 
a  tax  on  communications  is  a  check  on  commercial  inter- 
course, and  duties  on  legal  transactions,  if  widely  extended, 
prove  very  troublesome  and  annoying  to  the  most  active 
and  intelligent  members  of  a  community.  For  these  reasons 
it  is  desirable  to  keep  taxation  of  this  kind  as  a  subordinate 
resource  applied  only  to  3.  moderate  amount,  and  chiefly 
with  the  aim  of  completing  gaps  in  the  financial  system. 
The  difficulty  of  making  the  pressure  of  these  taxes  at  all 
proportional  or  even  of  analyzing,  their  incidence  ought  of 
itself  to  prevent  their  being  made  a  principal  source  of 
revenue.  But  when  used  partly  as  fees  for  special  services, 


326  PUBLIC    FINANCE.  [BOOK  III. 

partly  as  affecting  forms  of  wealth  that  are  very  likely  to 
escape  their  due  share  of  taxation  in  other  ways,  and  finally 
as  affording  valuable  tests  of  the  correctness  of  the  returns 
to  direct  taxation,  they  have  a  good  claim  to  continue  as  a 
subsidiary  means  of  revenue,  and  as  a  relief  to  the  pressure 
on  visible  income  of  the  purely  direct  taxes,  and  on  the 
general  consumption  of  the  community  from  taxation  of 
commodities.  The  extent  of  their  application  must  be 
decided  with  reference  to  the  particular  circumstances  of 
the  country,  and  the  opportunity  for  employing  direct 
taxation. 

§  11.  The  system  of  Finance  best  adapted  for  a  modern 
society  is  accordingly  one  in  which  the  objects  of  taxation 
are  judiciously  diversified  in  such  a  manner  as  to  realize  the 
ends  desired.  The  usual  source  of  taxation  is  national  in- 
come, the  mass  of  fresh  production  during  the  period  under 
notice,  and  one  most  desirable  part  of  the  revenue  system  is 
that  which  directly  receives  from  the  shares  of  this  fund  a 
contribution  towards  the  maintenance  of  the  State.  The 
rent  of  land,  the  interest  on  capital,  the  earnings  of  man- 
agement, and  the  wages  of  labour,  may  all  as  the  component 
parts  of  income,  be  rightly  made  contributory.  Whether 
they  should  be  imposable  in  their  separate  forms,  or  simply 
as  income,  is  in  principle  immaterial,  but  the  method  of 
distinct  taxes  on  each  share  seems  to  belong  to  a  lower 
stage  of  development  than  the  general  income  tax.  To 
escape  the  difficulties,  partly  technical  partly  political,  that 
direct  taxation  by  itself  creates,  the  taxation  of  various 
'  objects  '  on  which  income  is  expended,  must  generally  be 
adopted.  Instead  of  attacking  wealth  as  it  is  acquired,  its 
use  is  made  the  object  of  charge.  The  method  of  taxing 
producers  and  dealers,  in  order  that  they  may  pass  on  the 
charge  to  consumers,  is  a  recognition  of  the  tendency  of 
certain  taxes  to  shift  their  weight,  and  an  effort  to  utilize 
that  tendency  in  facilitating  the  collection  of  revenue. 

Taxation  of  income  and  of  commodities  are  the  two  great 
forms  of  revenue  receipts,  whose  importance  overshadows 


CHAP.  IV.]  THE   TAX   SYSTEM  :     ITS   FORMS.  327 

all  others  ;  but  while  this  is  apparent  in  every  budget,  it  is 
equally  true  that  a  certain  proportion  of  revenue  can  be 
obtained  by  the  operation  of  other  charges,  that  cannot 
easily  be  brought  under  either  of  the  leading  categories. 
Some  transactions  are  well  suited  for  the  imposition  of 
moderate  duties.  Communications  may  be  made  to  yield 
no  inconsiderable  resource  to  the  State,  and  above  all  the 
inheritance  of  property  is  at  once  a  means  of  testing  the 
accuracy  of  returns  as  to  income,  and  an  opportunity  for 
taxing  masses  of  accumulated  wealth. 

These  ingredients  of  a  well  ordered  system  require  to  be 
combined  in  very  different  proportions  at  the  several  stages 
of  development.  In  a  new  country,  with  sparse  population 
and  little  capital,  a  direct  income  tax  would  be  a  very 
defective  instrument.  Where  there  is  little  foreign  trade, 
and  most  commodities  are  produced  and  consumed  at  home, 
taxation  of  commodities  is  not,  and  cannot  be,  productive. 
Peculiarities  of  social  organization  have,  too,  considerable 
influence.  Taxation  of  inheritances  is  unsuited  for  a  com- 
munity where  the  family  is  the  unit  of  society,  and  property 
is  really  held  by  corporations,  not  by  individuals. 

How  important  the  special  circumstances  of  social  life 
may  be  in  this  respect  can  be  better  realized  if  we  reflect 
how  much  of  existing  English  taxation  rests  on  the  cir- 
cumstance that  wine,  tea,  and  tobacco,  are  not  native 
products 1. 

§  12.  We  thus  get  a  well-defined  system  of  taxation  com- 
prising the  three  departments  specified  in  the  preceding 
section,  and  it  seems  beyond  question  that  this  will  for  a 
long  period  be  the  prevailing  type.  So  far  as  any  general 
course  of  development  can  be  traced,  the  movement  is 
towards  a  greater  use  of  direct  taxation.  The  income  tax 
— a  product  of  the  present  century — is  on  the  whole  in- 
creasing in  favour,  and  the  imposition  of  higher  duties 
on  inheritances  is  also  probable.  The  great  importance  of 

1  The  last-named  only  through  the  legislative  prohibition,  slightly  relaxed  in 
the  past  few  years. 


328  PUBLIC    FINANCE.  [BOOK  III. 

both  excises  and  customs  is  nevertheless  a  prominent 
feature.  We  cannot  see  how  the  existing  outlay  of  any 
modern  State  could  be  maintained  without  their  aid.  We 
shall  indeed  discover  that  they  are  confined  to  one  branch  of 
Finance,  and  are  unfitted  to  be  local  resources  \  Still  the 
general  conclusion  is  clear,  that  the  great  divisions  of  the 
tax  system  are  likely  to  remain  in  active  use,  partly  no 
doubt  in  consequence  of  their  suitability  to  the  existing 
financial  organizations,  but  far  more  on  account  of  their 
serviceable  qualities. 

A  further  advantage  of  this  combination  should  be 
noticed — its  elasticity.  In  modern  Finance  it  is  desirable 
that  the  receipts  shall  be  capable  of  easy  adjustment  to  the 
expenditure  without  undue  inconvenience  to  the  contribu- 
tors. The  employment  of  the  different  forms  of  taxation 
tends  to  realize  this  object.  The  steady  growth  of  the 
receipts  from  commodities  in  times  of  prosperity,  the  de- 
finite yield  of  direct  taxes,  and  the  power  of  altering  the 
rate  of  the  income  tax,  taken  together,  provide  the  condi- 
tions for  securing  a  growth  or  contraction  of  receipts  as  may 
be  thought  best. 

1  See  ch.  6.  §  3. 


CHAPTER    V. 


THE  INCIDENCE  OF  TAXATION. 

§  1.  UP  to  the  present  we  have  avoided  all  but  the  most 
incidental  mention  of  the  difficult  problems  connected  with 
I  the  real  as  opposed  to  the  apparent  pressure  of  taxation. 
This  course  has  the  great  convenience  of  allowing  an 
acquaintance  to  be  made  with  the  leading  features  and 
general  guiding  rules  of  the  system  free  from  the  complica- 
tions that  are  inherent  in  any  discussion  of  the  question  of 
incidence.  The  omission  must  now  be  remedied  ;  we  have 
to  consider  the  nature  and  consequences  of  the  series  of 
processes  usually  known  as  shifting  or  repercussion  of 
taxation,  and  to  study  the  effects  produced  by  them  on  the 
financial  organization.  A  correct  solution  of  the  problem 
is  indispensable  for  full  knowledge  of  the  subject.  Our 
judgments  on  every  part  of  the  tax  system  will  be  affected 
by  our  theory  of  incidence.  Take,  e.  g.  the  question  of 
justice.  How  can  we  say  that  any  given  arrangement  of 
taxation  is  fair  unless  we  know  its  real,  not  merely  its 
apparent  incidence  ?  The  extent  and  limits  of  the  shifting 
of  taxation  are  elements  in  estimating  the  expediency  of 
exempting  the  minimum  of  subsistence,  of  imposing  a  pro- 
gressive income-tax,  or  of  taxing  articles  of  consumption. 
Instead  of  confining  our  attention  to  surface  appearances, 
we  must  examine  the  underlying  conditions,  and  estimate 
in  their  entirety  the  effects  of  fiscal  regulations. 


330  PUBLIC    FINANCE.  [BOOK  III. 

This  complicated  investigation  will  occupy  the  present 
chapter.  We  shall  seek  to  establish  the  general  laws  of 
repercussion  and  their  most  important  results,  reserving 
the  treatment  of  the  several  taxes  for  the  appropriate 
place1. 

§  2.  Popular  discussion  of  financial  matters  has  always 
given  a  large  place  to  this  special  topic.  The  real  inci- 
dence of  tithes,  of  import  duties,  or  of  local  rates  has  been 
hotly  debated  at  many  a  dinner-table  and  in  many  a 
tavern,  and  very  positive  conclusions  have  been  reached  in 
entire  ignorance  of  the  grave  difficulties  that  surround  any 
attempt  to  determine  accurately  these  and  similar  points. 
It  takes  some  training  to  see  that  confident  decisions  as  to 
the  division  of  rates  between  landlord  and  tenant,  or  of 
duties  between  producer  and  consumer,  cannot  be  made  in 
a  ready  and  off-hand  way.  Such  is  however  the  case. 
The  complications  are  too  great ;  the  subtle  modes  in 
which  pressure  applied  at  one  point  is  diffused  over  a 
wider  area  are  too  hard  to  be  followed  without  a  clear 
appreciation  of  the  general  conditions  and  a  careful  use  of 
the  slippery  instrument  of  abstract  deduction.  In  dealing 
with  the  problems  of  incidence  we  are  at  that  part  of 
Finance  that  touches  most  closely  on  economic  theory  in 
its  hardest  form. 

Scientific  students  have  long  recognised  the  fact,  and  the 
earliest  efforts  of  financial  inquiry  have  been  directed  to  the 
question  of  the  incidence  of  taxation.  In  some  instances  it 
was  apparent  that  duties  temporarily  paid  by  the  seller  of 
a  commodity  were  only  advanced  by  him,  to  be  obtained 
later  on  from  the  buyer  in  the  form  of  increased  price  2. 
The  extension  of  this  result  to  all  cases  of  taxation  on  pro- 
ducers or  dealers  was  so  plausible  that  it  became  an  accepted 
doctrine  of  practical  Finance  before  passing  into  a  theoreti- 

1  See  the  sections  on  incidence  in  the  several  chapters  of  Bk.  iv. 

2  Tacitus  notes  the  fact  in  the  case  of  slaves :  '  Vectigal  .  .  .  venalium  man- 
cipiorum  remissum,  specie  magis  quam  vi,  quia  cum  venditor  pendere  juberetur 
in  partem  pretii  emptoribus  accrescebat/  Ann.  xiii.  31. 


CHAP.  V.]  THE    INCIDENCE   OF  TAXATION.  331 

\ 

cal  form.  This  particular  position  dealt  only  with  readily 
observed  facts,  and  was  confined  to  outward  and  apparent 
effects  of  taxation.  A  far  more  important  step  was  made 
when  the  fruitful  idea  of  a  single  source  from  which  all 
taxes  must,  in  the  last  resort,  come  suggested  itself.  The 
doctrine  found  a  definite  expression  in  Locke's  statement, 
*  that  taxes  however  contrived,  and  out  of  whose  hands 
soever  immediately  taken,  do  in  a  country  where  their  great 
fund  is  in  land  for  the  most  part  terminate  upon  land1. 
Put  forward  tentatively  by  Locke  in  connexion  with  his 
controversy  as  to  interest  the  conception  of  land  as  the  true 
source  of  taxation  was  made  the  basis  of  a  practical  plan 
by  Vanderlint,  and  more  fully  developed  by  the  Physiocrats 
as  a  part  of  their  view  of  the  '  net  product.' 

This  earliest  scientific  theory  of  shifting  rested  on  certain 
general  assumptions,  some  of  which  we  have  already 
noticed2.  They  are  (i)  that  wages  are  at  the  minimum 
point  of  subsistence  ;  (2)  that  taxation  of  profits  will  drive 
capital  out  of  industry,  and  by  thus  reducing  the  supply 
raise  the  rate  to  its  former  point,  the  tax  excluded  ;  (3)  that 
expenditure  for  consumption  is  simply  the  employment  of 
income,  and  that  increased  prices  through  taxation  will 
compel  a  compensatory  increase  of  money  wages  and 
profits.  By  aid  of  these  propositions  it  was  easy  to  establish 
that  taxation  of  wages  or  profits  or  their  outlay  must  be 
passed  on  to  some  other  class  in  society.  The  gains  from 
commerce  and  professional  avocations  were  brought  under 
the  same  principle  by  the  ingenious  argument  that  they 
also  were  necessary  to  secure  the  continuance  of  the  trade 
or  profession  3. 

We  thus  obtain  a  rigorously  complete  theory  of  incidence 
accompanied  by  a  description  of  the  mode  in  which  the 
shifting  is  carried  out  from  the  points  of  initial  pressure  to 

1  'Considerations  on  the  Lowering  of  Interest,'  Misc.  Works,  595. 

2  Bk.  iii.  ch.  4.  §  2. 

3  See  Turgot,  i.  442-4,  for  an  application  of  this  argument  to  the  case  of 
Holland,  which  had  been  brought  forward  to  refute  the  doctrine  of  Quesnay. 


332  PUBLIC    FINANCE.  [BOOK  III. 

the  ultimate  resting-place.  The  equalizing  agency  of  com- 
petition and  the  necessity  for  normal  wages  and  profits  are 
the  forces  that  push  the  burden  of  taxation  on  to  the  land- 
owners' revenue.  The  conception  of  society  as  a  mechanism 
in  which  strains  were  distributed  in  obedience  to  general 
laws,  quite  independent  of  legislation  or  intention,  was 
thoroughly  grasped  by  the  physiocratic  school  and  was 
applied  by  them  to  this  as  to  other  questions 1. 

The  contrast  between  Adam  Smith  and  his  French  con- 
temporaries, so  often  noticed,  appears  clearly  in  his  treat- 
ment of  the  question  of  incidence.  The  sharp  and  definite 
theory  that  regards  all  taxation  except  that  on  rent  as 
necessarily  shifted  is  changed  into  the  broader  doctrine 
that  transference  may  or  may  not  take  place  according  to 
circumstances,  and  may  fall  on  any  one  of  the  three  con- 
stituents of  income.  In  the  application  of"  these  general 
positions  several  qualifications  are  introduced.  Taxes  on 
wages  are  always,  Adam  Smith  holds,  transferred  partly  to 
the  consumer  in  higher  price,  partly  to  the  landlord  in 
lower  rent.  The  employer  must  have  his  ordinary  profit, 
and  he  recoups  himself  for  his  larger  wages'  bill  by  in- 
creasing his  sale  price,  or  if  a  farmer,  by  giving  his  landlord 
a  smaller  amount  of  produce.  The  share  of  profit  known 
as  employers'  gain  is  also  unamenable  to  taxation,  as  being 
merely  the  necessary  reward  of  the  entrepreneur.  Interest, 
though  capable  of  bearing  some  of  the  public  charges,  is 
difficult  to  estimate,  and  its  root,  capital,  is  apt  to  emigrate 
under  exceptional  charges.  Taxes  on  necessary  articles  of 
consumption  tend  to  raise  the  wages  of  labour,  and  there- 
fore are,  like  direct  wages  taxes,  passed  on  to  the  consumer 
or  the  landlord.  A  house-tax  tends  to  fall  partly  on  the 
occupier,  partly  on  the  ground-landlord,  the  builder 
always  in  the  long  run  receiving  his  normal  profits. 

The  result  of  the  inquiries  on  incidence  in  the  Wealth  of 
Nations  is  a  modification  of  the  £conomistes  view.  The 

1  For  the  physiocratic  doctrine  of  incidence  see  Quesnay,  Second  Probteme 
(ed.  Daire),  127  sq.  ;  Turgot,  i.  392-444. 


CHAP.  V.]  THE   INCIDENCE   OF  TAXATION.  333 

landlord  is  still  the  chief  bearer  of  public  charges  which 
are  shifted  on  to  him  from  various  points,  while  his  special 
burdens  are  not  transferable  ;  but  he  is  not  the  sole  bearer  : 
the  capitalist  has  to  contribute  a  share,  and  the  vague  class 
of  consumers  has  to  pay  on  the  taxed  forms  of  expenditure, 
and  that  expenditure  may  come  from  rent,  profit,  or  even  (in 
the  case  of  taxes  on  luxuries)  wages.  The  landlord  has 
nevertheless,  as  Falck  remarks,  the  'lion's  share  of  the 
payment  of  taxes,'  and  therefore  in  part  Adam  Smith 
occupies  the  physiocratic  position  1. 

The  title  of  Ricardo's  treatise  marks  taxation  as  one  of 
its  subjects,  and  it  may  be  said  that  the  space  devoted  to 
that  topic  is  altogether  occupied  with  the  question  of 
incidence.  Adam  Smith's  positions  are  corrected  in  the 
light  of  the  newer  theories  of  population  and  rent/  In  fact 
Ricardo's  doctrine  of  taxation  is  a  development  of  his 
theory  of  distribution.  Notwithstanding  the  generally 
loose  form  of  his  writings,  there  is  an  amount  of  precision 
about  his  statements  as  to  the  movement  of  taxes  that  has 
made  him  the  leading  representative  of  economic  orthodoxy 
on  these  points.  Reduced  to  a  definite  form  his  views  are 
represented  in  the  following  propositions,  resting,  it  must  be 
noted,  on  the  assumptions  of  (i)  self-interest  as  the  motive- 
power  of  action,  and  (2)  the  universal  mobility  of  labour 
and  capital. 

(i)  A  tax  on  economic  rent  is  not  transferable  ;  it  remains 
on  the  landlord.  (2)  A  tax  on  ordinary  labour  is  trans- 
ferred to  the  employer,  and  is  in  reality  a  tax  on  profits. 
(3)  A  tax  on  profits  in  general  is  not  transferable,  and 
must  remain  on  the  capitalist ;  but  (4)  a  tax  on  the  profits 
of  a  particular  employment  will  be  transferred  to  the  con- 
sumers of  its  product.  (5)  Taxes  on  commodities  paid  by 
the  producer  are  passed  on  to  the  consumer,  as  in  the  case  of 
taxes  on  particular  profits.  (6)  In  the  case  of  commodities 

1  See  Wealth  of  Nations,  Bk.  v.  ch.  2.  pt.  2.  P'or  exposition  and  criticism 
of  his  views  see  Kaizl,  Uberwalzung,  3-8,  and  Falck,  Stemruberwalznn^, 
30-48. 


334  PUBLIC    FINANCE.  [BOOK  III. 

consumed  by  the  labourers  there  is  a  further  shifting  from 
the  consuming  labourers  to  the  capitalists  who  employ 
them l. 

The  main  outlines  of  this  theory  of  incidence  reappear 
in  J.  S.  Mill's  Principles,  with  some  not  unimportant  amend- 
ments. For  example,  the  higher  classes  of  wage-earners 
are  admitted  as  possible  bearers  of  taxation.  In  their  case 
a  tax  on  wages  may  or  may  not  be  shifted.  The  results  as 
to  tithes  and  profits  are  somewhat  altered,  and  greater 
emphasis  is  laid  on  the  tendency  of  profits  to  a  minimum. 
But  these  are  special  points :  speaking  broadly,  there  is  no 
part  of  Mill's  work  which  so  fully  deserves  the  description 
'  a  readable  Ricardo '  as  that  which  deals  with  taxation  2. 

§  3.  The  very  general  adoption  of  the  Ricardian  theory 
in  its  developed  form  as  the  sole  and  exclusive  scientific 
doctrine  makes  it  advisable  to  note  some  of  the  objections 
that  prevent  us  from  accepting  it  as  a  complete  interpreta- 
tion of  the  phenomena  of  incidence.  Some  of  these  criticisms 
have  been  forcibly  urged  by  Cliffe  Leslie  and  Held,  but 
they  may  be  put  in  a  more  general  form.  The  first  weak 
point  in  Ricardo's  position  is  his  ambiguous  treatment  of 
consumption  and  consumers.  In  his  general  scheme  of 
distribution  there  is  no  place  for  the  consumers  as  a  class, 
but  we  often  find  him  asserting  that  a  given  tax  does  fall 
on  '  the  consumer.'  How  are  we  to  explain  this  apparent 
discrepancy?  The  most  natural  answer  is  that  land- 
lords and  capitalists  make  up  this  class,  the  labourers 
being  normally  outside  it,  as  their  consumption  is  a  part  of 
the  expenses  of  production.  This  explanation  is  not  com- 
pletely satisfactory,  for  it  is  plain  that  all  landlords  and 
capitalists  are  not  affected  by  particular  taxes  falling  on 
consumers,  and  yet  no  criterion  of  separation  is  available. 
The  necessity  for  studying  the  forms  of  expenditure  as  a 

1  On  Ricardo's  doctrine  of  incidence  see  Falck,  48-70  ;  Kaizl,  8-n. 

2  On  J.  S.  Mill's  differences  from  Ricardo  see  Falck,  71-90.     He  points  out 
that  '  Mill's  doctrine  of  the  operation  of  taxes  differs  but  slightly  and  only  on 
special  points  from  that  of  Ricardo,'  71. 


CHAP.  V.]  THE    INCIDENCE   OF   TAXATION.  335 

department  of  Economics  seems  clear  from  tm\  considera- 
tion. Besides  the  pressure  that  falls  on  the  primary  divisions 
of  income  there  is  the  additional  one  on  the  employment  of 
that  income,  and  differences  in  employment  produce  differ- 
ences in  pressure.  A  doctrine  of  incidence  that  is  confined 
to  the  receipt  of  income  without  regard  to  its  expenditure 
;  is  so  far  defective.  A  second  objection  to  the  theory  is  its 
I  dependence  on  a  few  unduly  simplified  conditions.  Social 
forces  are  regarded  as  definite  and  precise  in  their  action, 
and  very  positive  statements  are  made  on  the  strength  of  this 
insecure  foundation.  Thus  taxes  on  wages  and  on  labourers' 
necessaries  are  regarded  as  being  always  transferred  to  the 
capitalist,  a  proposition  true  only  on  the  assumption  that 
wages  are  at  the  minimum,  and  that  any  change  in  them 
will  at  once  act  and  act  proportionately  on  population.  In 
the  same  way  the  equality  of  profits  and  the  complete 
dependence  of  rent  on  the  margin  of  cultivation  are  made 
to  support  very  sweeping  propositions  as  to  the  incidence  of 
taxation.  If  we  allow  that  the  economic  forces  of  popula- 
tion and  competition  in  regard  to  the  employment  of  capital 
and  the  movement  of  cultivation  are  not  quite  so  regular  in 
their  action  the  deductions  made  from  them  must  be 
qualified. 

|  Thirdly,  the  theory  exaggerates  the  simplicity  not  merely 
of  economic  forces  but  also  of  the  forms  of  taxation.  Taxes 
on  rent,  on  profits  or  on  wages  are  not  ail  the  same,  and 
the  particular  modes  of  imposition  often  affect  the  inci- 
dence. There  is  need  for  much  care  and  discrimination  in 
using  those  results  of  deduction  that  depend  on  the  identi- 
fication of  so  many  different  taxes. 

]  Finally,  there  is  far  too  little  notice  taken  of  the  actual 
\  facts  and  of  the  unavoidable  limitations  in  the  application 
of  theoretical  principles.  The  orthodox  theory  of  incidence 
professes  to  explain  what  will  happen  in  the  long  run,  *  but 
taxes/  as  Leslie  remarked,  'are  paid  immediately  under 
the  real  conditions  of  life  and  out  of  the  actual  wages  and 
profits  or  other  funds  of  individuals,  not  out  of  hypotheses 


336  PUBLIC    FINANCE.  [BOOK  III. 

or  abstractions  in  the  minds  of  economists  V  Knowledge 
of  what  will  happen  when  the  limit  is  reached  is  desirable, 
but  what  takes  place  during  the  process  of  adjustment  is 
also  important. 

The  existence  of  these  imperfections  does  not  destroy 
the  great  service  of  the  doctrine  as  a  preliminary  or  intro- 
ductory inquiry  ( Vorstndium).  Without  some  such  attempt 
the  intricacies  of  incidence  could  never  be  explained,  and  it 
is  by  expansion  and  correction  of  the  Ricardian  procedure 
that  advance  can  best  be  made  in  the  explanation  of  these 
problems.  As  an  intellectual  exercise  the  abstract  theory 
of  the  shifting  of  taxation  has  a  high  disciplinary  value. 
The  root-error  of  its  followers  lay  in  taking  a  part  for  the 
whole. 

§  4.  The  course  of  development  in  the  preceding  theories 
is  clear  enough.  From  the  first  suggestion  of  Locke  to  the 
compact  exposition  of  J.  S.  Mill  there  can  be  traced  a  series 
of  connecting  links  and  alterations  in  consequence  of  wider 
knowledge.  Adam  Smith  has  the  French  theory  constantly 
in  mind,  as  Ricardo  in  turn  has  the  ideas  of  the  Wealth  of 
Nations.  All  have  in  common  the  recognition  of  certain 
points  on  which  the  pressure  of  taxation  ultimately  rests, 
and  all,  it  may  be  added,  suggest  the  wisdom  of  adapting 
legislation  to  the  conditions  of  incidence  in  order  to  secure 
a  fair  distribution,  or  at  least  to  prevent  unnecessary  waste 
through  friction. 

Another  group  of  doctrines  has  a  quite  different  tendency. 
In  place  of  investigating  the  complicated  shiftings  that 
settle  the  ultimate  incidence,  it  either  denies  the  possibility 
of  ascertaining  them  or  assumes  that  they  bring  about  a 
general  diffusion  of  the  burden  over  the  whole  society. 
The  natural  conclusion  is  that  the  particular  forms  of  taxa- 
tion are  altogether  immaterial,  as,  whatever  be  the  immediate 
charges,  the  burden  is  finally  distributed  in  an  equitable 
manner. 

The  first  scientific  statement  of  this  view  is  ascribed  to 

1  Essays  (and  edition},  384. 


CHAP.  V.]  THE    INCIDENCE   OF  TAXATION.  337 

N.  F.  Canard,  whose  essay,  attacking  the  theory  that  all 
taxation  must  fall  on  the  owners  of  land,  obtained  a  prize 
from  the  French  Academy.  The  gist  of  his  argument  is 
that  there  is  surplus  product  in  labour  and  commerce  as 
well  as  land,  and  that  taxation  falls  on  all  of  these  *  net 
products.'  The  process  of  diffusion  is  carried  out  by  ex- 
change, buyer  and  seller  in  each  transaction  dividing  the- 
amount  of  tax  imposed,  and  at  every  fresh  exchange  a  divi- 
sion of  the  part  of  taxation  transferred  takes  place  until  ulti- 
mately the  charge  is  spread  over  all  the  parties  concerned. 
Extending  this  conception  to  the  whole  society,  taxation 
comes  to  be  regarded  as  after  a  time  diffused  equably 
among  all  its  members.  The  qualification  of  time  is 
important,  as  the  process  of  diffusion  is  not  complete  at " 
first,  consequently  old  taxes  are  the  best,  and  all  new  taxes, 
or  even  changes  in  existing  ones,  are  to  be  deprecated  as 
disturbing  this  beautiful  and  harmonious  distribution,  which 
relieves  the  legislator  of  any  trouble  respecting  the  apparent 
merits  or  demerits  of  existing  taxes 1. 

The  comfortable  nature  of  this  theory  makes  it  a  popular 
one  with  statesmen.  Without  adopting  Canard's  peculiar 
explanation  of  the  mode  of  diffusion,  Thiers  asserts  the 
general  diffusion  of  the  public  charges ;  Stein,  from  a  still 
different  point  of  view,  reaches  what  is  practically  the  same 
result.  In  his  opinion  the  whole  theory  of  shifting  is  an 
error  arising  from  imperfect  comprehension  of  the  real 
->  nature  of  the  process,  which  in  reality  contains  two  different 
*  parts.  For,  first,  a  tax  is  a  part  of  the  cost  of  production  S 
similar  to  the  expense  of  raw  materials  or  labour,  and  like 
other  expenses  must  enter  into  price,  and  taxation  is  through 
this  medium  diffused  '  from  one  to  another '  until  it  extends 
to  all.  Again,  from  a  higher  point  of  view,  the  portion 
of  product  paid  in  taxes  is  a  surplus  product,  the  result  of 
the  services  of  the  state  administration,  which  pays  back 
at  least  what  it  receives.  The  conception  of  incidence  of 

1  Canard's  Principes  d"  Economic  politique  appeared  in   1802.     See  Kaizl, 
1 1-15,  for  a  clear  summary. 

Z 


338  PUBLIC    FINANCE.  [BOOK  III. 

taxation  has  to  be  replaced  by  that  of  the  c  production  of 
taxes1.' 

Closely  allied  to  the  negative  doctrine  of  incidence  is  the 
disposition  on  the  part  of  some  writers  to  regard  the 
problem  as  insoluble,  and  at  the  same  time  to  treat  all 
questions  of  taxation  as  if  it  were  non-existent  To  deny 
that  the  incidence  of  taxation  is  discoverable  seems  to  be 
the  first  step  towards  believing  that  it  is  unimportant2. 

No  lengthy  criticism  of  the  negative  theory  of  in- 
cidence is  needed.  Facts  speak  for  themselves  :  if  the 
incidence  of  the  public  burdens  be  really  so  settled  that 
,  legislative  action  has  no  effect,  how  comes  it  to  pass  that 
some  forms  of  taxation  are  much  more  oppressive  than 
others?  It  is  impossible  to  escape  entirely  the  weight  of  a 
load  by  judicious  arrangement  of  it,  but  it  is  quite  feasible 
to  diminish  the  fatigue  it  produces.  Canard's  doctrine  is 
contrary  to  experience,  and  is  not  established  by  abstract 
reasoning.  There  can  be  no  doubt  that  taxes  are  not 
always  a  part  of  cost  of  production,  but  in  any  case  the 
real  question  is  whether  they  can  always  be  shifted  by 
the  immediate  payer,  and  to  this  the  answer  must  be  a 
decided  negative.  The  jesire  to  pass  on  the_burden  may 
be  universal?  but  the  capacity  to  do  so  is  limited.  Even  in 
the  special  case  of  taxes  on  commodities  it  is  not  always 
open  to  the  producer  to  shift  the  duty  to  the  consumer. 
As  regards  other  taxes,  the  very  idea  of  cost  of  production 
is  quite  inapplicable. 

§  5.  Proceeding  to  examine  the  conditions  of  incidence, 
it  is  well  to  remember  that  the  total  denial  of  the  existence 
of  shifting  and  the  assertion  of  its  universal  existence  are 
both  unfounded.  That  e.g.  taxes  on  commodities  are 
sometimes  transferred  by  the  immediate  payers  is  an 
obvious  fact.  No  one  can  believe  that  the  distillers  bear 


1  Stein,  ii.  550-591. 

2  A  prominent  representative  of  this  attitude  is  Held,  who  declares :  '  Die 
Uberwalzung  ist  gewiss  kein  reines  Phantom,  aber  sie  ist  noch  weniger  im 
einzelnen  Falle  nachweislich]  Einkommensteuer,  145-6. 


CHAP.  V.]  THE    INCIDENCE   OF   TAXATIOI^.  339 

X. 

the  whole  burden  of  the  English  spirit  duties.  On  the 
other  hand,  it  is  just  as  incredible  that  a  landlord  could 
entirely  shift  a  tax  on  rent  to  his  tenant  or  any  other 
class,  or  that  the  payers  of  income-tax  could  completely 
relieve  themselves  at  the  expense  of  others.  The  existence 
and  the  extent  of  the  process  of  transference  must  depend 
largely  on  the  conditions  of  the  case,  and  it  is  these  con- 
ditions that  a  general  theory  of  incidence  has  to  consider 
and  explain. 

The  course  of  transference  may  be  in  different  directions, 
and  according  to  its  starting-point  and  direction  it  is  neces- 
sary to  distinguish.  Where  the  shifting  is  from  the  pro- 
ducer to  the  consumer,  or  more  generally  from  the  seller 
to  the  buyer,  there  is  '  forw^roV  incidence ' ;  where  th(f 
movement  is  from  the  buyer  to  the  seller,  there  is  '  back- 
ward incidence';  where  the  process  of  shifting  affects  more 
than  two  parties,  it  may  be  called  '  diffused  incidence  V 

The  simjpjest  instance  of  shifting  TsTas  more  than  once 
mentioned,  that  in  which  the  producer   of  a  commodity    . 
passes  on  the  charge  in  increased  price  to  the  consumer. 
A  closer  examination  of  this  familiar  case  will  suggest  some 
important  conditions.     Why  does  the  buyer  submit  to  this     / 
additional  charge?     An  increase  irt  price  tends  to  reduce^ 
demand,  and   will  not  the  falling  off  bring   about  a    re- 
turn  to  the   old  level?     The  usual   reply  would   be  that 
the  dealer  or  producer  had  been  obtaining  normal  profits 
before  the   imposition    of  the  tax,  and   that   without   an 
increased  return  proportional  to  his  new  charge  he  would 
not  or  could  not  continue  in  the  business.     The  doctrine    . 
of  average  profits   resulting  from  the  perfect  mobility  of 
capital  is  thus  the  foundation  of  the  proposition  that  taxes 
on  commodities  levied  on  the  producer  are  shifted  to  the 
consumer.     The    reason    for   the    proposition   also   shows 

1  The  terms  in  the  text  are  the  nearest  equivalents  of  Fortivahung,  Riick- 
walzung,  and  Weiterwalzung,  which  are  used  by  German  writers,  but  with 
various  minute  differences.  The  process  called  '  Abwalzung'  by  Hock  and 
Wagner  should  not  be  regarded  as  belonging  to  the  subject  at  all.  See  Hock, 
96;  Wagner,  ii.  346-8. 

Z  2 


340  PUBLIC    FINANCE.  [BOOK  III. 

its  limitations  ;  wherever  an  industry  is  yielding  such 
exceptional  gains  that  taxation  will  not  reduce  them  below 
the  supposed  normal  level,  the  motive  for  abandoning  the 
employment  not  being  present,  the  force  that  produces 
shifting  will  not  be  in  operation.  It  may  therefore  be 
allowed,  that  so  far  as  producers'  gains  are  at  all  of  the 
nature  of  monoply,  taxation  will  remain  on  them.  But 
here  a  further  qualification  is  presented.  Exceptional 
gains  may  be  made  by  some  producers,  but  not  by  others  ; 
in  fact  in  nearly  every  industry  some  of  those  engaged 
in  it  can  barely  hold  their  ground.  This- unfortunate  class 
must,  on  the  increase  of  taxation,  either  raise  their  price 
or  leave  their  business  ;  if  they  can  succeed  in  the  former 
attempt,  their  successful  competitors  will  gain  by  it,  and 
shift  their  charge  to  the  consumer ;  if  they  fail,  the  margin 
of  pure  profit  is  raised,  and  the  burden  will  remain  on  the 
producers.  It  is  quite  possible  that  the  actual  result  may 
be  a  compromise.  Some  of  the  weakest  producers  may  be 
driven  out,  but  the  price  may  also  be  somewhat  raised,  in 
which  case  there  will  be  division  of  the  charge.  Therefore 
the  true  conclusion  is,  that  with  perfect  mobility  taxation 
will  be  shifted  from  producer  to  consumer,  with  strict  I 
monopoly  it  will  remain  on  the  producer,  and  .that  in  the 
various  intermediate  positions  either  result  is  possible,  but 
a  compromise  is  most  likely.  Again,  the  possibility  of 
shifting  taxation  of  the  kind  under  notice  does  not  depend 
simply  on  the  elasticity  of  supply,  the  effect  of  changes  in 
price  on  demand  must  be  considered.  If  increased  expen- 
diture has  to  be  devoted  to  taxed  articles,  there  is  less 
to  be  applied  in  the  purchase  of  others ;  the  consequent 
reduction  may  lower  prices  in  other  industries  from  which 
withdrawal  is  not  economically  expedient,  and  accordingly 
diffuse  the  indirect  incidence  of  the  tax  to  a  different  set  of 
producers.  Further,  it  must  be  remarked  that  as  all  in- 
dustrial processes  are  really  complex,  it  is  quite  possible 
that  a  tax  may  not  affect  the  holder  of  floating  capital  who 
is  ready  to  seek  other  investments,  but  may  fall  entirely  on 


CHAP.  V.]  THE    INCIDENCE   OF   TAXATION.  34! 

the  owners  of  land,  or  specialized  capital  suitable  for  the 
production  of  the  article.  Both  land  and  fixed  capital  are  \/ 
indeed  capable  of  different  uses,  but  the  alternative  ones 
are  necessarily  less  profitable  than  that  in  which  they  are 
actually  engaged.  Hindrances  to  mobility  are  hindrances 
tp_  shifting  of  taxation.  The  very  application  of  a  tax  of 
itself  produces  disturbing  effects.  Additional  capital  has 
to  be  employed,  restrictions  which  mean  the  sacrifice  of 
time  and  money  come  into  force,  both  tending  to  reduce 
the  number  of  producers  and  to  concentrate  industry. 
The  production  approaches  to  a  qualified  monopoly,  and  ^ 
thus  the  weight  of  taxation  falls  so  far  as  actual  receipts 
are  concerned  on  the  consumers,  with  a  further  loss  to  the 
small  producers  excluded  from  the  business. 

The  precise  method  of  taxation  employed  will  have  an 
important  influence ;  whether  the  duty  be  imposed  at  an 
early  stage  or  allowed  to  lie  over  till  the  article  is  ready 
for  the  consumer,  whether  the  measure  adopted  is  supposed 
capacity  of  production  or  actual  product,  are  very  material 
circumstances  in  deciding  the  exact  incidence. 

The  apparently  simple  case  of  taxation  of  commodities 
thus  appears  to  be  really  surrounded  with  complications 
that  need  close  and  careful  study.  The  same  questions 
would  arise  if  the  tax  were  levied  directly  from  the  con- 
sumer ;  there  would  be  the  possibility  of  a  backward 
incidence,  just  as  there  is  of  failure  of  the  forward  one. 
In  fact,  as  the  position  is  sometimes  explained,  there  is 
a  struggle  between  producer  and  consumer,  each  striving  ^ 
to  throw  the  loss  on  the  other,  and  much  will  depend  on 
the  economic  strength  of  the  parties.  As  a  rule,  producers 
are  a  smaller  and  better  organized  class,  and  therefore  have 
the  chances  in  their  favour,  though  where  they  possess 
a  monopoly  or  any  differential  gain,  this  advantage  is  lost 
to  them.  Fresh  increases  of  taxation  are  more  readily 
passed  on  to  the  consumer  than  reductions  are  restored 
to  him.  This  element  of  friction  has  another  effect.  Small  */ 
additional  amounts  of  taxation  are  not  easily  shifted ;  a 


342  PUBLIC    FINANCE.  [BOOK  III. 

few  pence  on  or  off  the  gallon  of  spirits  cannot  directly 
influence  retail  price.  The  initial  shifting  always  implies 
an  effort,  which  however  very  readily  takes  place  in  indus- 
tries accustomed  to  alter  prices  as  the  various  expenses 
of  production  change.  Additional  taxation  and  a  rise  in 
the  price  of  hops  are  events  of  exactly  the  same  kind  to 
the  brewer,  and  their  final  result  is  distributed  in  the  same 
way. 

The  diffusion  of  the  burden  may  be  still  more  compli- 
cated. In  modern  society  products  pass  through  the  hands 
of  several  distinct  classes  before  reaching  the  consumer,  and 
the  struggle  of  buyer  and  seller  will  be  repeated  at  each 
separate  stage.  The  existence  of  monopoly  or  of  some 
form  of  limitation  at  any  point  may  prevent  the  shifting 
passing  any  further.  An  economically  strong  intermediate 
group  may  throw  a  charge  back  to  the  producer,  send  it 
forward  to  the  consumer,  or  divide  it  between  both. 

The  foregoing  analysis  of  the  actions  and  reactions  that 
may  accompany  or  result  from  the  imposition  of  a  tax 
on  a  commodity  shows  the  general  conditions  that  are 
influential.  They  are  (j)  the  presence  or  absence  of  mobi- 
lity ;  in  the  former  case,  the  normal  shifting  to  the  con- 
sumer will  take  place;  in  the  latter,  it  is  retarded:  (2)  the 
law  of  demand,  on  which  depends  very  much  the  extent 
to  which  there  will  be  a  reflection  of  the  burden  either 
back  to  the  producer  or  to  other  industries :  (3)  the 
method  of  taxation  as  affecting  the  preceding  conditions : 

(4)  the  organization  of  the  industry  and  its  division,  and. 

(5)  the  amount  of  taxation.     In  regard  to  this  last  circum- 
stance, it  may  happen  that  additional  taxation  will  increase 
the  force  of  competition.     The  new  element  may  be  just 
the  last  thing  wanting  to  break  up  the  existing  settled 
conditions.     This  will  be  easily  understood  by  considering 
the  effect  of  successive  very  small  additions  to  the  duty  on 
a  given  article.     Each  of  these  will  tend  to  remain  on  the 
the  payer,  but  as  soon  as  the  additions   are   sensible   or 
easily  distributed  the  shifting  movement  will  tend  to  act. 


CHAP.  V.]  THE    INCIDENCE    OF   TAXATION  343 

The  most  rigid  and  gainful  monopoly  must,  if  taxation  be 
carried  sufficiently  far,  either  pass  on  the  weight  or  abandon 
the  undertaking. 

§  6.  The  comparatively  easy  case  of  a  tax  on  goods 
enables  us  to  perceive  the  general  character  of  the  changes 
in  incidence  produced  by  the  process  of  shifting.  We  have 
now  to  deal  with  the  more  important  and  interesting  ques- 
tion of  the  movements  of  incidence  in  respect  to  the 
incomes  of  the  different  economic  classes.  The  whole 
tendency  of  modern  Economics  has  been  in  the  direction 
of  emphasizing  the  fundamental  similarity  between  the 
departments  of  exchange  and  distribution  l.  Rent,  wages, 
interest,  and  employers'  earnings  are  exhibited  as  the  prices 
of  the  respective  services  of  land,  labour,  capital,  and  busi- 
ness ability.  Might  we  not  say  that  a  tax  on  any  of  these 
commodities  would  be  amenable  to  the  same  reasoning  as 
that  already  applied  to  material  goods,  the  consumers  of 
each  of  the  factors  of  production  being  those  other  factors 
that  need  its  co-operation  ?  This  mode  of  treatment  is,  we 
believe,  inconvenient,  owing  to  the  distinguishing  pecu- 
liarities of  the  shares  in  distribution.  Their  production  is 
not  in  the  same  form  or  subject  to  the  same  conditions 
as  that  of  ordinary  commodities.  Nor  is  the  nature  of 
demand  the  same  in  respect  to  them.  To  reduce  them  to 
a  common  heading  would  be  an  undue  straining  of  the 
analogy  that  undoubtedly  exists.  A  better  mode  of  deal- 
ing with  the  question  is  rather  to  consider  it  in  the  light 
of  the  theory  of  distribution,  while  availing  ourselves  of 
whatever  is  applicable  in  the  case  of  taxation  of  material 
commodities. 

There  is  no  need  for  attempting  here  to  re-state  the 
economic  theory  of  distribution.  The  work  of  Ricardo 
has  been  filled  in  and  placed  in  closer  relation  to  actual 
conditions  by  the  ablest  workers  of  the  past  and  present 

1  '  The  theories  of  the  values  of  labour  and  of  the  things  made  by  it  cannot 
be  separated ;  they  are  parts  of  one  great  whole,'  Marshall,  Principles, 
Preface,  viii. 


344  PUBLIC   FINANCE.  [BOOK  III. 

generations  \  who  have  carefully  elaborated  the  originally 
fragmentary  doctrines  on  the  subject.  The  main  conditions 
affecting  changes  in  distribution  must  however  be  noticed  : 
for  the  effect  of  taxation  is  plainly  a  deduction  from  the 
total  produce,  i.  e.  so  much  loss  to  be  re-distributed  among 
the  parties  concerned  2. 

Assuming  competition,  the  main  circumstances  on  which 
the  amount  of  rent  depends  are  the  position  of  the  margin  of 
cultivation,  and  the  several  qualities  of  land  that  lie  above 
it.  Change  either  the  worst  land  in  cultivation,  or  the  rela- 
tion to  it  of  the  superior  soils  and  the  quantity  of  rent  will 
be  altered 3.  In  estimating  the  incidence  of  a  tax  on  rent, 
its  effect  on  these  conditions  is  the  first  consideration. 
The  usual  way  of  showing  that  a  tax  on  rent  cannot  be 
shifted  is  to  point  out  that  it  does  not  affect  that  particular 
land  that  pays  no  rent,  and  consequently  leaves  the  deter^ 
mination  of  the  total  amount,  including  the  tax,  as  before.] 
Ricardo  and  some  of  his  nearest  disciples  differed  as  to  the 
incidence  of  tithes  or  proportional  taxes  on  the  raw 
produce  of  land.  The  former  maintained  that  such  a  tax 
must  fall  on  the  consumer,  since  in  the  case  of  products 
from  the  worst  land  in  cultivation  there  was  no  rent  on 
which  it  could  be  placed,  and  it  was  the  production  from  this 
laud  that  determined  price ;  as  the  cultivator  would  need 
his  average  profit,  the  shifting  to  the  consumer  was  neces- 
sary. Senior  and  McCulloch  held  that  the  rise  of  price 
would  cheek  demand,  and  therefore  by  changing  the  posi- 
tion of  the  margin  in  an  upward  direction  would  reduce 


1  See  Ricardo,  Principles,  chs.  1-6 ;    J.  S.  Mill,  Principles,  Bk.  ii ;    Sidg- 
wick,  Principles,  Bk.  ii.  chs.  6-9  ;   Walker,  Political  Economy,  pt.  iv  ;   Mar- 
shall, Economics  of  Industry,  Bk.  ii.  chs.  6-12  ;    Principles  of  Economics, 
Bk.  vii.  chs.  4-11. 

2  The  increased  produce  that  wisely  expended  taxation  provides  is  not  a 
determinable  quantity,  otherwise  it  would  perhaps  be  well  to  meet  the  loss  out 
of  it,  as  the  older  theory  of  state  services  would  suggest. 

3  The  facts  that  land  may  vary  in  productiveness  either  from  fertility  or 
situation,  and  that  cultivation  may  be  either  extensive  or  intensive,  make  the 
statement  more  complex,  but  do  not  alter  its  essential  nature. 


CHAP.  V.]  THE    INCIDENCE   OF   TAXATION.  345 

rent  *.  Without  discussing  the  special  point^a^jssue,  which 
belongs  to  the  group  of  land  taxes2,  we  see  that  the  criterion 
used  by  both  is  the  effect  on  the  general  condition  of 
agricultural  industry.  That  on  the  hypothesis  of  perfect 
competition  a  tax  on  rent  must  remain  on  the  payers  is  an 
indisputable  truth,  but  for  the  cases  of  actual  taxation  it  is 
important  to  bear  in  mind  that  economic  rent  is  mixed  up 
with  other  elements.  The  investment  of  capital  in  land 
yields  a  return  in  many  instances  indistinguishable  from 
economic  rent,  but  at  the  same  time  it  is  '  really  the  profits 
of  the  landlord's  stock  V  So  far  as  no  discrimination  can 
be  made  between  these  components,  the  incidence  of  a  tax 
will  fall  to  some  extent  on  the  return  to  capital,  and,  if 
sufficient  to  discourage  its  investment,  will  tend  to  be  passed 
on  to  the  consumers  of  agricultural  products,  since  land  of 
inferior  natural  quality  must  be  cultivated  in  order  to 
supply  the  required  quantity. 

The  opposite  case  of  taxes  imposed  elsewhere  falling  on 
rent  is  much  more  probable.  The  class  of  differential  gains 
of  which  rent  is  one  very  conspicuous  instance  is  peculiarly 
liable  to  be  affected  by  taxation.  The  influence  of  com- 
petition is,  speaking  generally,  effective  in  distributing  special 
burdens  on  a  particular  industry  ;  but  where  special  gains 
have  been  obtained  an  equivalent  tax  is  the  restoration  not 
the  destruction  of  equality.  This  is  the  kernel  of  truth  in 
the  Physiocrats'  belief,  and  on  it  their  exaggerated  doctrine 
was  based,  v  No  kind  of  actual  tax  can  be  imagined  which 
might  not  under  certain  conditions  diminish  the  fund  that 
goes  to  the  landowner.  Wages,  interest,  employers'  receipts, 
duties  on  goods,  or  on  acts,  all  supply  such  examples,  and 
they  all  accomplish  their  effect  by  operating  on  the  margin 
of  cultivation  in  the  widest  sense.  The  complicated  work- 
ing of  the  tax  system  is  very  well  shown  by  this  circum- 
stance. It  is,  as  we  discovered,  very  difficult  to  single  out 

*  See  Ricardo,  Works,  104  ;  Senior,  Political  Economy,  123  ;  McCullcch, 
note  30  to  Wealth  of  Nations 

2  See  Bk.  iv.  ch.  i.  3  Ricardo,  102. 


346  PUBLIC    FINANCE.  [BOOK  III. 

differential  gains  for  exclusive  or  extra  taxation,  but  the 
ordinary  agencies  of  economic  life  are  tending  to  that 
object,  though  of  course  in  a  very  limited  and  imperfect 
way.  They  strike  as  well  the  earned  and  the  unearned 
increment,  the  investment  profitable  through  the  foresight 
of  the  prudent  employer  and  the  lucky  chance  of  the  rash 
speculator,  the  rents  of  careful  and  improving  as  well  as  of 
inattentive  and  tyrannical  landlords. 

§  7.  Taxation  of  the  capitalist's  share  of  the  national 
income  gives  rise  to  more  difficult  problems  than  those 
connected  with  rent.  Between  the  doctrine  of  Turgot  that 
a  tax  on  profits  is  always,  and  that  of  Ricardo  that  it  is 
never  shifted1,  we  have  to  take  an  intermediate  position. 
A  general  tax  on  interest  as  it  affects  all  employments 
equally  would  appear  certain  to  remain  on  the  payers. 
The  mobility  of  capital  cannot  here,  so  long  as  we  con- 
fine our  attention  to  a  single  country,  have  any  effect. 
Where  the  tax  does  not  extend  to  capital  invested  abroad 
it  is  evident  that  it  would  discourage  home  investments 
.  and  lead  to  the  emigration  of  wealth  to  other  places.  '  The 
proprietor  of  stock,'  as  Adam  Smith  tells  us,  *  is  properly  a 
citizen  of  the  world,  and  is  not  necessarily  attached  to  any 
particular  country2'.  Even  within  a  limited  area  another 
feature  of  capital  will  affect  the  incidence  of  special  taxes 
imposed  on  it.  Unlike  land,  it  can  be  indefinitely  increased 
by  human  foresight  and  providence,  having  as  a  chief 
inducement  the  return  to  be  obtained  by  investment.  Taxa- 
tion on  interest  lowers  that  return  and  is  therefore  a  direct 
discouragement  to  saving.  So  far  as  it  is  effectual,  the  diminu- 
tion in  the  supply  of  available  capital  tends  to  raise  the  rate 
of  interest  and  transfer  the  incidence  to  the  consumers  of 
capital,  i.  e.  the  other  factors  in  distribution,  and  as  rent  is 
not  likely  to  be  much  affected,  in  reality  to  the  producers, 
including  both  employers  and  labourers.  How  far  the 
check  to  production  will  show  itself  in  a  higher  cost  of 
production  and  therefore  fall  on  the  consumer  is  not  easily 

1  Turgot,  i.  63  ;  Ricardo,  122.  2   Wealth  of  Nations >  358. 


CHAP.  V.]  THE    INCIDENCE   OF  TAXATION.x  347 

determinable  ;  if  there  were  to  be  a  substantial  check  to  the 
investment  of  capital  this  would  be  a  probable  result, 
causing  a  diffusion  of  the  incidence,  some  of  it  return- 
ing to  the  capitalist  in  his  capacity  of  consumer. 

.  For  most  purposes  of  economic  reasoning  there  is  an  ad- 
vantage in  neglecting  the  differences  between  the  different 
forms  of  capital  and  dealing  solely  with  the  characteristics 
common  to  all.  But  in  handling  the  problem  of  incidence 
it  is  necessary  to  see  that  there  are  two  broad  classes  of 
reproductive  wealth,  the  one  free  and  capable  of  being 
turned  in  any  direction  ;  the  other  fixed  in  some  particular 
industry.  It  is  primarily  to  the  former  that  the  arguments 
from  the  mobility  of  capital  apply.  Once  invested,  the 
difficulties  of  withdrawal  place  the  possessor  for  the  time 
in  the  same  position  as  the  landlord.  A  tax  on  fixed 
capital  would  then  seem  to  resemble  in  its  effects  a  tax  on 
rent,  and  to  be  equally  untransferable.  One  instance — 
that  of  land  improvements — has  been  already  discussed, 
and  in  considering  it  we  saw  that  the  mode  of  relief  to  the 
capitalist  was  simply  by  reducing  future  investments.  The 
single  tax  on  fixed  capital  in  the  sense  used  by  Menier 
and  his  followers  would  be  at  first  a  heavy  burden  on 
the  owners  of  those  forms  of  wealth,  that  would  later 
on  show  itself  in  reduced  investment  and  retarded  pro- 
duction. 

Free  capital,  if  separately  taxed,  has  much  readier  modes 
of  escape.  Employment  outside  the  particular  tax  area 
makes  it  very  difficult,  even  if  the  law  enacts  it,  to  enforce 
collection,  consequently  the  chance  of  placing  a  tax  on 
movable  capital  is  much  reduced  by  both  economical  and 
technical  circumstances. 

The  chief  condition  then  on  which  the  incidence  of  a  tax 
on  interest  depends  is  the  effect  on  the  accumulation  and 
investment  of  capital,  including  the  action  on  the  saving 
propensities  of  the  inhabitants  and  their  disposition  to  move 
their  wealth  to  escape  taxation.  If  the  rate  of  interest  is 
determined  by  what  Jevons  calls  the  *  final  utility  '  of  capital, 


348  PUBLIC    FINANCE.  [BOOK  III. 

it  is  plain  that  the  possibility  of  shifting  the  tax  will  depend 
on  the  effect  produced  on  this  margin  of  investment.  If  it 
is  forced  up  the  weight  will  be  transferred  from  the  reci- 
pients of  interest  to  that  indeterminate  class  who  gain  by 
the  cheapness  of  capital 1.  A  tax  on  the  returns  of  fixed 
capital  will  at  first  rest  on  the  payers,  and  only  be  trans- 
ferred with  difficulty,  but  it  will  ultimately,  when  the  old 
supply  is  sufficiently  contracted,  come  under  the  same 
influences. 

Mixed  up  with  the  interest  of  capital  in  Ricardo's  treat- 
ment of  taxes  is  that  element  of  profit  variously  described 
as  '  wages  of  superintendence;'  '  earnings  of  management,' 
or  '  employers'  gain.'  It  has,  however,  strong  claims  to 
separate  treatment.  The  profit  of  the  entrepreneur  has 
some  points  of  resemblance  with  wages  as  it  has  others 
with  rent,  and  we  must  therefore  be  .prepared  to  find  that 
the  movement  of  taxation  is  different  in  its  case  from  that 
of  ordinary  interest.  The  analogy  of  rent  would  lead  us  to 
believe  that  a  tax  on  the  gains  of  the  employer  would  not 
be  transferred,  since  there  would  be  no  opportunity  for 
escape  on  the  part  of  the  immediate  bearers.  A  tax  on 
this  very  indeterminate  element  of  the  gross  profit  of  busi- 
ness would,  however,  be  certain  in  practice  to  trench  on  the 
other  constituents.  Limited  as  the  gains  of  employers  are 
by  the  competition  of  inferior  rivals  the  effect  of  a  tax  in 
driving  out  the  weakest  of  those  engaged  in  the  business 
would  help  to  shift  a  part  at  least  of  the  weight  from  the 
survivors.  Taxation  of  this  kind  would  operate  somewhat 
as  taxation  of  commodities.  The  objection  may  occur  that 
when  the  gains  of  all  industries  are  taxed  there  is  no  motive 
for  the  weaker  employers  giving  up  business.  They  can, 
however,  pass  on  to  the  class  of  labourers  as  others  by 
taxation  may  be  hindered  from  leaving  it 2.  (The  position 

1  '  Either  the  labourers  themselves  or  the  public  generally  as  consumers '  is 
Jevons'  statement,  Theory,  278. 

2  '  It  is  laid  down  that  taxes  on  the  profits  of  all  employments  fall  on 
capitalists  only,  and  cannot   be  shifted  on  any  other  class.     But  there  is  in 


CHAP.  V.]  THE    INCIDENCE   OF   TAXATION.  349 

of  the  marginal  employer  appears  as  the  condition  deter- 
mining the  shifting  of  taxes  on  the  employer's  gain.  ) 

This  share  of  national  income  may  also  suffer  through  the 
operation  of  taxes  on  commodities.  When  a  duty  of  this 
kind  is  not  transferred  to  the  consumer  the  burden  is  likely 
to  fall  on  the  differential  element  in  profits  ;  the  tax  has  to 
be  paid  without  the  compensation  of  a  rise  in  price,  and 
there  is  no  way  of  shifting  the  burden  unless  in  the  case  of 
raw  materials  where  rent  may  be  curtailed.  It  is  quite  in 
accordance  with  the  analogous  case  of  rent  that  taxes  should 
be  shifted  to  the  peculiar  gains  of  the  employer.  It  is, 
besides,  possible  that  a  tax  on  interest  may  be  transferred 
to  profit  in  the  limited  sense.  When  the  rate  of  interest  is 
raised,  as  we  have  seen  that  it  may  be,  by  taxation,  the  em- 
ployer has  to  pay  dearer  for  his  borrowed  capital,  and,  so  far 
as  what  he  works  with  is  his  own,  loses  on  one  hand  what  he 
gains  with  the  other.  On  the  whole  we  may  confidently  say 
that  the  broad  and  simple  statement  that  taxes  on  profits  fall  **\ 
on  the  capitalist,  who  can  in  no  wise  transfer  them  to  others, 
requires  to  be  very  much  limited  before  it  can  be  accepted 
as  correct.  We  must  separate  the  two  essentially  different 
elements  of  interest  and  employer's  gain  and  recognise  that 
while  the  one  is  affected  by  changes  in  the  point  of  final 
'utility  of  capital,  the  other  is  connected  with  the  oppor- 
tunity for  profitable  industrial  effort. 

§  8.  If  the  older  theories  on  the  subject  of  incidence 
assumed  too  hastily  that  rent  and  profits  had  to  bear  their 
own  immediate  burdens  and  under  certain  conditions  those 
of  others,  they  made  amends  when  dealing  with  wages. 
The  transference  of  taxes  on  this  part  of  revenue  was 
asserted  in  the  most  positive  manner.  The  landlord,  the 
capitalist,  the  consumer  might  all  be  affected  by  a  tax  on 
wages,  but  the  labourer  himself  was  always  exempt  from 
contributing  to  the  requirements  of  the  State.  This  immu- 

reality  a  perpetual  migration  along  the  borders  between  capital  and  labour,  as 
there  is  also  an  intermediate  class  who  individually  may  be  regarded  as 
capitalists  or  workmen,'  Leslie,  Essays,  390-1. 


350  PUBLIC    FINANCE.  [BOOK  III. 

nity  extended  to  the  higher  kinds  of  wages  and  salaries 
since  they  had  a  fixed  relation  to  the  ordinary  rate 1. 

The  historical  explanation  of  this  belief  is  afforded  by  the 
evolution  of  the  system  of  hired  labour  from  the  earlier  con- 
dition of  serfdom.  The  slave  as  an  instrument  of  produc- 
tion received  what  was  needed  for  his  maintenance  ;  any 
reduction  in  its  amount  would  reduce  his  efficiency.  Taxa- 
tion was  paid  only  out  of  his  master's  income,  it  did  not 
concern  the  living  machines  engaged  in  the  creation  of 
wealth.  This  conception  survived  in  the  earlier  period  of 
free  labour,  and  gained  support  from  the  doctrine  of  a 
*  natural '  rate  of  wages  common  to  the  French  and  English 
economists  Any  reduction  in  the  rate  would,  it  was  held, 
act  on  population,  and  by  diminishing  its  number  restore 
the  former  real  reward  of  the  labourer.  In  spite  of  occa- 
sional concessions  such  was  the  opinion  of  Turgot,  of  Adam 
Smith,  and  of  Ricardo  2,  and  gwen  the  premiss  the  conclu- 
sion was  sound  enough.  It  is  also  true  that  in  the  France 
of  the  eighteenth  century  and  the  England  of  the  Napo- 
leonic war  wages  did  seem  to-. have  touched  the  subsistence 
point  and  to  give  a  direct  verification  of  the  economical 
doctrine.  But  strange  to  say  there  was  no  notice  taken  of 
the  fact  that  one  of  the  causes  of  this  deplorable  situation 
was  the  heavy  and  unequal  pressure  of  taxation.  The* 
French  peasant  and  the  English  labourer  were  the  greatest 
sufferers  by  the  fiscal  systems  under  which  they  lived  and 
financial  reform  was  one  of  the  means  of  their  relief. 

No  account  of  the  incidence  of  a  tax  on  wages  can  be 
satisfactory  that  does  not  fully  recognise  the  existence  of 
varying  standards  of  comfort,  even  among  the  lowest  un- 
skilled labourers  at  different  times  and  places.  Beside  and 
above  the  physical  minimum  there  is  what  Mill  calls  a 

1  '  The  recompense  of  ingenious  artists  and  of  men  of  liberal  professions  .  .  . 
necessarily  keeps  a  certain  proportion  to  the  emoluments  of  inferior  trades,' 
Wealth  of  Nations,  366  ;  cp.  Turgot,  i.  444.     The  salaries  of  state  officials  are 
the  only  exception  allowed  by  Adam  Smith. 

2  See  the  passages  already  quoted. 


CHAP.  V.]  THE    INCIDENCE   OF   TAXATION.  351 


'moral'  minimum.  The  conditions  must  be  exceptionally 
unfortunate  that  do  not  allow  the  labourer  something  above 
mere  subsistence,  and  when  that  minimum  point  is  ex- 
ceeded there  is  something  on  which  taxation  may  fall.  To 
judge  the  incidence  of  taxation  we  must  know  its  effect  on 
the  standard  of  comfort.  If  that  is  retained  unaltered  there 
will  be  a  transference  of  the  tax  to  the  capitalist  or  employer ; 
if  it  is  lowered  the  labourer  bears  the  tax  himself.  This 
consideration  applies  to  each  industrial  grade,  but  it  is 
evident  that  the  higher  the  usual  scale  is  placed  the  less 
the  probability  that  it  will  be  readjusted  to  suit  taxation. 
When  a  group  of  labourers  possesses  a  monopoly  it,  in 
common  with  all  holders  of  differential  gains,  has  no  power 
of  throwing  off  the  burdens  imposed  on  it,  and  as  most 
skilled  labourers  have  more  or  less  special  advantage  the 
shifting  of  taxes  in  their  case  is  beset  with  difficulty. 

As  in  the  case  of  rent,  interest,  and  profit  we  find  that 
the  ultimate  incidence  of  a  tax  on  wages  will  vary  accord- 
ing to  its  effect  on  the  standard  of  living  usual  in  that  class 
and,  so  far  as  the  higher  kind",  of  wages  are  concerned,  the 
extent  to  which  their  receivers  are  privileged  through 
natural  or  artificial  causes.  Special  gains  of  labour  are 
just  as  much  at  the  mercy  of  fresh  taxation  as  any  other 
differential  advantage.  The  process  of  shifting  requires  the 
actual  exertion  of  force  to  carry  it  out,  and  those  forces 
can  only  be  the  agencies  that  work  through  supply  and 
demand.  If  the  same  supply  of  labour  of  any  particular 
kind  is  forthcoming  with  an  unchanged  demand  then  direct 
taxation  of  labour  will  not  be  transferred.  The  great  diffi- 
culty of  adjusting  the  supply  of  labour  is  a  reason  for 
believing  that  any  shifting  of  taxes  imposed  on  it  must 
be  a  slow  and  uncertain  process. 

A  similar  conclusion  applies  to  the  case  of  taxes  on  the 
labourer's  consumption.  We  do  not  find  that  duties  on 
food  produce  higher  wages  ;  they  only  bring  the  starvation 
point  nearer,  as  the  history  of  the  English  Corn  Laws  shows. 
When  Ricardo  argues  that  taxes  on  articles  of  the  labourer's 


352  PUBLIC    FINANCE.  [BOOK  III. 

consumption  are  exactly  the  same  as  a  tax  on  profits  he 
assumes  far  too  rigid  a  connexion  between  the  cost  of 
living  and  the  supply  of  labour.  A  tax  on  the  food  of 
animals  used  in  production  would  increase  cost  because 
the  food  so  given  is  regulated  to  secure  efficiency,  but  the 
labourer  seeks  to  procure  the  best  terms  for  himself.  The 
element  of  free  contract  present  in  the  latter  case  entirely 
alters  the  position.  For  completeness  of  statement  it  is 
desirable  to  add  that  a  great  deal  of  wages  is  really  the 
return  on  capital  invested  in  the  education  of  the  workers, 
but  in  reality  this  does  not  produce  as  much  practical  effect 
as  might  be  expected.  A  tax  on  wages  unaccompanied  by 
an  equivalent  tax  on  the  yield  of  material  capital  would 
apparently  discourage  expenditure  in  the  formation  of 
personal  or  immaterial  capital  and  turn  it  towards  the 
production  of  goods.  This  check  to  the  supply  of  trained 
workers  would  tend  to  raise  the  price  of  their  services  and 
shift  the  pressure  to  the  consumers  of  the  goods  produced 
by  them  or  to  the  employers.  In  practice  the  calculations 
of  parents  and  others  who  make  the  investment  in  the  edu- 
cation of  the  young  are  not  so  carefully  worked  out  as  to  be 
influenced  by  the  existence  of  a  tax  on  the  wages  of  the 
higher  employments.  Still,  even  with  the  actual  imperfect 
estimates,  some  effect  would  probably  be  traceable  if  the  tax 
were  a  heavy  one.  The  necessary  expenses  of  living  in  a 
suitable  way  and  the  cost  of  training  are  the  two  agencies 
that  give  some  justification  for  Adam  Smith's  doctrine  of 
a  balance  not  to  be  disturbed  by  taxation  between  the 
different  employments. 

§  9.  Our  examination  of  the  general  conditions  that  help 
to  determine  the  true  incidence  of  taxes  on  the  different 
constituents  of  income  though  necessarily  brief  at  least 
makes  it  plain  that  the  theoretical  explanation  of  the  sub- 
ject is  not  the  simple  process  sometimes  imagined.  The 
movement  of  a  given  tax  is  not  invariably  in  the  same 
direction  :  its  course  will  be  guided  by  the  surrounding 
circumstances.  Without  knowing  what  these  are  we  cannot 


\ 

CHAP.  V.]  THE    INCIDENCE   OF  TAXATION.  353 

tell  the  direction  much  less  the  precise  extent  of  its  inci- 
dence. To  pretend  to  say  where  e.  g.  a  tax  on  profits  will 
fall  without  possessing  further  data  is  as  vain  as  to  seek  to 
determine  the  space  traversed  by  a  moving  body  whose 
initial  velocity  and  period  of  movement  are  both  unknown. 
The  difficulty  of  estimating  the  incidence  of  taxation  is 
increased  by  the  complementary  alterations  that  take  place 
in  the  economic  system.  A  change  in  rent  implies  changes 
in  the  amount  and  probably  in  the  relations  of  the  other 
shares  in  distribution  ;  a  rise  or  fall  in  the  price  of  one 
article  leads  to  other  changes  of  price,  and  we  may  there- 
fore expect  that  even  in  the  most  precise  and  determinate 
cases  of  incidence  some  additional  diffused  effect  will  be 
produced. 

At  the  best  and  after  the  exercise  of  the  utmost  care, 
there  will  remain  some  obscurity  as  to  the  exact  extent  to 
which  shifting  takes  place,  owing  chiefly  to  the  difficulty  of 
employing  statistical  verification.  Deduction  from  general 
propositions  cannot  overcome  this  obstacle :  special  vigi- 
lance is  therefore  necessary  to  avoid  errors  arising  from  the 
want  of  a  check  such  as  the  process  of  verification  provides. 
The  earlier  theories  are  so  many  warnings  of  the  danger  of 
hasty  deductions  from  insufficient  premisses. 

But,  subject  to  these  cautions,  the  use  of  the  theory  is 
by  no  means  slight.  We  may  not  be  able  to  give  confident 
answers  to  general  questions  on  the  subject,  but  in  dealing 
with  particular  instances  we  shall  have  the  advantage  of 
knowing  what  conditions  we  ought  to  notice  and  what 
effects  we  may  reasonably  look  for.  So  understood,  the 
theory  of  incidence  is  an  indispensable  part  of  financial 
doctrine. 


A  a 


CHAPTER    VI. 
THE  PRINCIPLES  OF  LOCAL  TAXATION. 

§  1.  BESIDES  the  system  of  taxation  intended  for  the 
support  of  the  central  government,  and  therefore  usually 
described  as  '  general/  or  *  imperial,'  the  compulsory 
revenue  needed  for  the  due  maintenance  of  local  authorities 
requires  to  be  considered.  This  latter  class  of  charges  is 
just  as  much  entitled  to  the  name  of  taxation,  and  in  many 
respects  exhibits  the  same  features  as  the  imperial  tax 
revenue.  Local  and  central  government  are  simply  different 
forms  of  the  state  organization  and  show  this  fundamental 
resemblance  in  Finance  as  in  other  respects.  The  need  of 
revenue,  the  general  characteristics  of  that  revenue  in 
respect  to  its  origin,  and  the  influence  that  it  exerts  on 
individual  and  national  wealth  are  the  same  in  the  case  of 
central  and  local  bodies.  It  might  almost  seem  that  no 
necessity  existed  for  a  separate  treatment  of  the  tax  receipts 
of  those  smaller  units  that  historical  circumstances  or  the 
needs  of  social  life  have  called  into  being. 

But,  notwithstanding  this  general  similarity,  there  are 
certain  peculiarities  in  the  methods  of  local  Finance  that 
make  it  desirable  to  consider  the  forms  of  taxation  used  by 
it  in  a  separate  chapter.  Without  in  the  slightest  abandon- 
ing the  conception  of  the  unity  of  all  taxation,  we  may 
examine  those  aspects  of  local  taxation  that  give  it  in  some 
degree  a  distinct  and  common  character,  and  enable  us 
to  contrast  with  advantage  the  two  categories  of  revenue 


V 

CHAP.  VI.]      THE    PRINCIPLES   OF   LOCAL   TAXATION.  355 

belonging  respectively  to  the  supreme  and  the  subordinate 
political  bodies. 

One  very  obvious,  though  rather  superficial  reason  is  found 
in  the  great  magnitude  of  each  class.  The  English  Imperial 
revenue  for  1886-7  was,  in  round  figures,  £90,000,000,  that 
for  local  purposes  was  £66,750,000.  In  other  countries 
there  is  the  same  possibility  of  opposing  the  two  sets  of 
charges  without  finding  any  such  difference  as  to  warrant 
us  in  regarding  one  as  entirely  insignificant.  When  we  add 
that  local  charges  are  on  the  whole  increasing  more  rapidly, 
it  is  easy  to  understand  the  interest  that  has  been  excited 
respecting  them. 

There  are  other  and  deeper  reasons.  Local  institutions 
have  a  special  function  as  representing  the  interest  of 
particular  districts  ;  they  are  confined  to  a  somewhat  narrow 
range  of  duties  and  as  a  consequence  their  revenue  system 
is  simpler  and  less  involved  than  that  of  the  State.  A  rural 
commune  must  have  a  comparatively  primitive  form  of 
financial  organization,  and  even  in  the  case  of  the  largest 
sub-divisions  the  absence  of  military  and  naval  expenditure 
and  the  large  portion  of  other  public  duties  discharged  by 
the  agents  of  the  central  government  keep  down  their 
requirements.  The  expenditure  of  a  great  municipality,  or 
a  large  American  State  is  no  doubt  considerable  and  for 
very  varied  objects,  but  cannot  compare  in  extent  or  in 
comprehensiveness  with  any  national  budget.  Moreover, 
the  restraint  imposed  on  their  financial  action,  either  by- 
legislation,  or  (in  federal  States)  by  constitutional  limitations, 
is  a  serious  check  on  the  power  of  local  bodies l. 

Another  reason  may  also  be  assigned :  the  subjects  with 
which  local  administration  has  to  deal  are  mainly  of  an 
economic  character  and  very  often  admit  of  rather  definite 


1  In  such  governments  as  England  or  France  the  legislature  can  completely 
control  the  fiscal  expedients  of  municipalities  and  other  smaller  territorial  ad- 
ministrations. The  powers  of  the  American  '  State '  are  limited  (a)  by  the  federal 
constitution,  (£)  by  the  state  constitution.  Cities  are  controlled  by  state  legis- 
lation, cp.  Bryce,  American  Commonwealth,  i.  498. 

A  a  2 


35^  PUBLIC   FINANCE.  [BOOK  III. 

measurement.  Water-supply,  lighting,  drainage,  and  the 
care  of  roads  are  instances.  The  conduct  of  such  matters, 
if  it  has  some  resemblance  to  the  duties  of  the  national 
government,  has  others  no  less  strong  to  the  management 
of  an  industrial  company.  The  propositions  that  '  contri- 
butions should  be  proportional  to  advantage  received,'  and 
that  *  political  power  should  depend  on  the  amount  con- 
tributed '  are  much  more  plausible  when  applied  to  local 
than  to  general  government.  The  extent  of  this  resem- 
blance will,  of  course,  depend  on  the  special  character  of  the 
sub-division.  A  rural  parish,  or  commune^  is  in  this  respect 
very  different  from  London  or  Paris,  but  the  prominence  of 
economic  interests  in  the  widest  sense  is  traceable  in  all 
forms  of  subordinate  governments. 

§  2.  The  history  of  local  institutions  has  already  been 
briefly  noticed  in  connexion  with  expenditure l,  and  it 
throws  light  equally  on  their  receipts.  One  prominent 
class  of  these  bodies  is  really  a  '  survival '  of  what  were 
orginally  sovereign  powers.  The  '  States '  of  Germany 
and  America,  and  the  'cantons'  of  Switzerland  are  well- 
known  examples.  Lower  down  in  the  scale  the  commune 
is  the  primitive  political  'unit'  whose  importance  has  also 
decayed  with  the  growth  of  the  State.  In  all  of  them  the 
taxing  power  has  been  limited  by  the  pressure  and  com- 
petition of  the  national  government,  and  in  the  earlier 
forms  by  the  slow  development  of  taxation.  /The  manor} 
or  '  village  community,'  depended  on  economic  revenue, 
not  on  taxation  in  the  modern  sense.  /One  striking  feature 
in  state  development  has  been  the  absorption  of  the  more 
productive  forms  of  compulsory  revenue  by  the  central 
financial  system./  It  was  only  natural  that  the  monarchical 
State  with  its  hostility  to  feudalism  and  to  local  privileges 
and  immunities  of  all  kinds  should  endeavour  to  take  into 
its  own  hands  the  customary  taxes  of  districts  and  munici- 
palities. The  centralizing  movement  of  the  sixteenth  and 

1  See  Bk.  i.  ch.  7.  §§  2  sq. 


CHAP.  VI.]      THE   PRINCIPLES   OF   LOCAL   TAXATION.  357 

seventeenth  centuries  was  specially  noticeable  in  respect  to 
taxation. 

Motives  of  convenience  assisted  in  promoting  this  change. 
Some  of  the  principal  forms  of  revenue  were  manifestly 
unsuitable  for  small  territorial  divisions.  The  taxation  of 
commodities  or  of  income  was  far  better  fitted  for  the 
control  of  the  central  government.  Thus,  both  political 
and  economic  reasons  existed  for  the  breakdown  of  the 
older  tax  revenue  of  towns  and  localities. 

The  existing  systems  of  local  administration  have,  in 
many  cases,  a  quite  different  origin  ;  instead  of  being  older 
than  the  State  they  are  its  direct  creation.  In  France,  for 
example,  the  whole  tax  system  of  the  l  departments '  and 
'  communes '  rests  on  legislation  not  a  century  old,  and 
though  English  institutions  have  a  longer  history,  they  are 
equally  the  expression  of  the  State's  will  *.  Thus  local 
institutions  are  not  always  survivals,  or  even  revivals,  of  the 
past ;  they  are  often  entirely  new  formations,  so  arranged 
as  to  satisfy  the  needs  for  which  devolution  of  authority 
has  been  deemed  expedient. 

In  such  instances  their  power  of  taxing  is  a  concession 
strictly  limited  by  the  terms  of  the  grant.  The  adoption 
of  new  expedients  is  precluded  so  that  very  often  it  is 
merely  the  amount  of  one  particular  tax  that  has  to  be 
settled  and  that  only  within  definitely  fixed  limits.  Local 
taxation  becomes,  in  fact,  a  kind  of  supplement  to  the 
general  system  admitting  of  little  independent  movement. 
The  two  opposing  tendencies  that  affect  local  administration 
are  also  in  operation  here.  On  the  one  hand,  there  is  the 
desire  of  skilled  financiers  to  keep  the  errors  and  mistakes 
of  the  smaller  bodies  under  supervision.  Party  spirit  and 
class- interest  are  intensified  when  confined  to  a  small  area 
and  are  but  too  ready  to  employ  taxation  as  an  engine  of 
oppression  :  even  when  no  injustice  is  intended  the  ignorance 

1  The  great  measures  of  legislation  on  local  government  are  (i)  The  Poor 
Law  Act,  1834;  (2)  Tne  Corporation  Reform  Act,  1835;  (3)  The  Local 
Government  Act.  1888- 


358  PUBLIC   FINANCE.  [BOOK  III. 

of  the  real  working  of  taxation  that  is  so  common  among 
local  administrators  would,  if  unchecked,  prove  disastrous 
to  the  national  interest.  Hence  the  limitations  on  the 
form  and  amount  of  taxation  as  well  as  on  its  application. 
The  citizen  who  is  unfairly  burdened  by  his  local  taxes  has 
as  legitimate  a  claim  to  relief  as  if  the  general  charges  were 
too  heavy  in  proportion  to  his  income. 

Side  by  side  with  this  idea  of  more  careful  control  there 
is  the  disposition  to  extend  the  sphere  of  action  of  local 

/  authorities.  It  is  felt  that  political  education  is  promoted 
by  inducing  citizens  to  manage  their  common  affairs  in  an 
independent  manner.  To  awaken  or  to  strengthen  the 
feeling  of  responsibility  is  impossible,  unless  power  to  act 
is  also  bestowed.  A  local  body  cannot  be  expected  to  feel 
any  great  interest  in  its  work  if  all  the  important  parts  of 
the  system  are  determined  beforehand.  To  secure  a  vigor- 
ous municipal  life  there  must  be  a  good  deal  of  latitude 
given  to  the  corporations  engaged  in  its  management. 
Wider  taxing  powers  and  new  forms  of  local  revenue  are, 
therefore,  often  suggested  as  indispensable  steps  in  reform. 
To  understand  the  position  of  the  question  we  must  bear 
in  mind  the  existence  of  these  apparently  contradictory 
sentiments  both,  in  some  cases,  vehemently  urged  by  the 
same  persons. 

§  3.  The  first  step  in  an  examination  of  the  principles  of 

\  local  taxation  is  the  determination  of  the  proper  line  of 
division  from  the  general  state  revenue.  We  have  seen 
that  the  distribution  of  duties  between  central  and  local 
administration  conforms  on  the  whole  to  certain  general 
principles1,  and  the  most  natural  course  would  be  to 
apportion  the  charges  on  a  similar  system,  but,  in  fact,  there 
is  no  real  correlation  between  the  two :  the  division  of 
duties  is  quite  independent  of  the  division  of  taxes,  just  as 
both  are  distinct  from  the  distribution  of  public  property 
and  quasi-private  receipts.  The  partition  of  taxes  between 


Bk.  i.  ch.  7.  §§  6,  7,  8. 


CHAP.  VI.]      THE   PRINCIPLES   OF   LOCAL   TAXATION.  359 

the  two  classes  must  depend  on,  or  at  least  be  guided  by, 
financial  and  economic  considerations. 

Some  important  taxes  are  at  once^erf  sound  principles 
shut  out  from  use  as  local  resources.  The  customs  are  only 
levied  at  the  national  frontier,  any  attempt  to  restore  the 
provincial  customs-boundaries  that  hampered  the  trade  of 
France  before  the  Revolution,  and  in  the  present  century 
that  of  the  German  and  Italian  States,  would  be  a  retro- 
grade, as  well  as  an  unpopular,  step  in  Finance.  The  taxation 
of  commodities  in  transitu  is  only  legitimate,  when  exercised 
in  a  way  calculated  to  cause  the  smallest  amount  of  delay 
and  inconvenience.  To  regulate  trade  between  small  areas 
for  fiscal  purposes  would  be  at  once  costly  and  unproductive, 
and  therefore  uneconomical.  The  earliest  step  towards 
federation  between  independent  States  has  been  the  abolition 
of  custom  houses  at  their  frontiers,  and  there  is  no  proba- 
bility that  a  reversal  of  this  salutary  process  will  be  witnessed. 
The  octrois  are  an  exception,  but  admit  of  explanation. 
They  are  confined  to  towns  and,  therefore,  are  regulated 
with  comparative  ease,  having,  in  fact,  some  resemblance 
to  the  market  dues  once  so  common  in  British  towns.  They 
make  as  near  an  approach  to  direct  taxes  on  local  con- 
sumption as  can  well  be  devised,  with  some  additional  in- 
cidence on  the  surrounding  country  through  their  effect  on 
demand.  Besides,  they  are  unquestionably  a  decaying 
form.  France  and  Italy  are  the  only  countries  where  they 
are  in  full  force,  and  even  in  these  they  are  looked  on  as  a 
necessary  evil.  It  is  almost  certain  that  in  the  progress  of 
reform  they  will  before  long  disappear.  On  the  same 
grounds  local  excise  taxes  are  practically  prohibited.  To 
impose  a  duty  on  an  article  without  having  the  power  of 
levying  an  equivalent  customs  duty  would  mean  the  sacrifice 
of  local  producers,  unless  they  had  a  strict  monopoly  up  to 
the  amount  of  the  tax  ;  such  a  tax  would  be  easily  evaded 
by  moving  outside  the  boundary.  Thus  the  two  great 
forms  of  indirect  taxation  on  commodities  are  withdrawn 
from  local  resources.  Direct  duties  on  consumption  might 


360  PUBLIC    FINANCE.  [BOOK  III. 

be  used,  but,  as  will  appear,  they  are  objectionable  in 
either  general  or  local  Finance  owing  to  the  difficulties  of 
estimation  1. 

The  income  and  property  taxes  are  as  unavailable  though 
for  a  different  reason.  Both  are  essentially  personal  and 
belong  to  a  given  individual.  Now  to  tax  a  person  on  his 
income  for  the  service  of  the  locality  in  which  he  resides  is 
open  to  the  doublej^bjection  that  it  is  likely  to  bejsvaded 
and  is  grossly  unfair.  Local  authorities  have  no  efficient 
machinery  for  detecting  concealed  income:  they  are  in  a 
worse  position  than  the  English  revenue  officials  in  regard 
to  foreign  investments  where  failure  is  admitted.  The 
mere  moving  from  the  area  for  part  of  the  year  would  upset 
the  arrangements.  As  to  the  unfairness  Mr.  Goschen's 
view  seems  conclusive.  '  It  appears  to  be  impossible  to 
devise  an  equitable  local  income  tax,  for  you  cannot  localize 
income.  An  attempt  was  made  in  Scotland,  and  it  broke 
down  when  an  English  Lord  Chancellor,  who  drew  his 
;£io,ooo  a  year  in  London,  but  had  a  small  place  in  Scot- 
land, was  made  to  pay  income  tax  on  the  whole  of  his 
income  in  that  country  as  well  as  in  this2.'  No  real 
correction  could  be  made  without  exempting  all  income 
earned  outside  the  district,  i.  e.  in  fact,  changing  the  income 
into  a  partial  produce  tax.  No  matter  how  large  the  local 
division  may  be  the  same  objection  lies.  The  American 
States  and  Swiss  cantons  are  as  little  suited  for  the  appli- 
cation of  separate  income  taxes  as  England,  Ireland  and 
Scotland.  Owing  to  the  variety  of  modern  incomes  and 
the  trouble  of  following  them  to  their  sources  the  income 
tax  should  always  be  a  general  tax.  A  general  property 
tax  is  in  much  the  same  position  in  local  taxation,  though 
its  defects  as  a  part  of  any  tax  system  are  so  great  that  it 
is  doubtful  whether  it  can  be  admitted  even  into  the  list  of 
good  national  taxes.  It  appears  to  have  the  two  great 
faults  of  injustice  in  distribution  and  liability  to  evasion. 
On  both  these  points  the  American  evidence  respecting  the 
1  Bk.  iv.  ch.  5.  §  6.  2  Local  Taxation,  204. 


CHAP.  VI.]      THE   PRINCIPLES   OF   LOCAL   TAXATION.  361 

state  property  taxes  is  overwhelming.  Large  categories 
of  property  escape  altogether,  and  others  are  sometimes 
taxed  in  two  different  places.  Personal  property  is  either 
not  returned  for  assessment  at  all,  or  is  scandalously  under- 
rated. Stocks,  bonds,  and  various  immaterial  forms  of 
wealth  are  easily  removed  from  the  tax-collector's  notice. 
Efforts  at  reform  have  proved  ineffectual,  and  com- 
petent students  seem  agreed  that  the  system  must  be 
abandoned l. 

The  reasons  for  the  removal  of  taxes  on  income,  property 
and  commodities  from  the  list  of  local  resources  are  in  a 
great  degree  technical,  and  rest  on  the  difficulties  of  their 
fair  or  economicLapplication.  But  it  is  further  plain  that 
there  must  be  a  large  body  of  productive  taxation  reserved 
to  the  central  government.  Even  if  all  the  taxes  mentioned 
were  eminently  fitted  by  their  nature  to  contribute  to  local 
revenue,  they  would  have  to  be  reserved  for  the  still  more 
important  services  of  the  national  administration.  So  much 
depends  on  division  of  duties  between  the  two  sets  of 
organs  and  their  relative  cost,  that  it  is  hardly  possible  to 
lay  down  any  general  rule  on  this  part  of  the  subject.  We 
may  fairly  assume  that  at  lowest  one  half  of  the  total  sum  ,N> 
collected  in  taxes  will  have  to  be  taken  by  the  central ;, ', 
government. 

§  4.  On  the  other  hand  there  is  a  different  class  of  taxes 
that  appears  well  fitted  for  local  treatment.  Such  are  those 
that  are  levied  locally  on  fixed  property  and  permanent 
occuf  itions  carried  on  in  the  locality.  First  in  natural 
order  is  the  landjtax.  Both  abstract  reasoning  and  experi- 
ence tend  to  show  that  a  large  proportion  of  local  taxation 
must  be  obtained  from  this  important  '  object.'  In  rural 

1  See  the  Local  Taxation  Report  of  Mr.  Wells  and  his  colleagues  made  in 
1871  ;  Prof.  Seligman's  article  on  'The  General  Property  Tax,'  Pol.  Science 
Quarterly ,  v.  24-62  ;  and  Prof.  Ely's  Taxation,  146-201,  in  which  a  mass  of 
evidence  is  collected  showing  the  grievances  that  arise  from  the  property  tax. 
Prof.  Ely,  however,  fails  to  notice  that  the  same  arguments  may  be  urged 
against  the  state  income  taxes  advocated  by  him  in  a  later  part  of  his  valuable 
work  (287-311). 


362  PUBLIC    FINANCE.  [BOOK  HI. 

districts  there  is  little  else  to  be  taxed,  and  in  the  case  of 
towns  the  value  of  land  is  so  much  increased  by  the  action 
of  social  conditions,  that  it  forms  a  most  suitable  mark  for 
the  larger  taxation  that  the  wants  of  urban  societies  make 
necessary.  The  theory  of  incidence  also  supports  this 
view.  Other  charges  are  often  shifted  to  rent,  while  it  can 
hardly  ever  transfer  its  peculiar  burdens.  As  a  land  tax 
tends  to  become  a  tax  on  rent,  and  can  generally  be  so 
regulated  to  take  that  shape,  it  has  the  definiteness  of  inci- 
dence in  its  favour,  and  its  pressure  falls  on  a  form  of  wealth 
that  is  likely  to  grow  without  effort  on  its  owner's  part. 
The  doctrine  of  taxation  in  proportion  to  service,  though 
untenable  in  general,  has  here  some  force.  The  chief  gain 
of  local  expenditure  accrues  to  those  who  own  property  in 
the  district.  Some  advantages  may  be  more  evident  in 
their  effects  than  others,  but  in  a  broad  general  way  the 
advance  of  a  locality  means  an  advance  in  the  rent  of  its 
area.  There  are  no  doubt  exceptions :  unfortunate  pro- 
prietors have  sometimes  had  to  pay  for  '  improvements  ' 
that  lowered  the  value  of  their  land,  but  on  the  whole  the 
opposite  effect  is  more  common  1. 

Next  to  the  land  tax  we  may  place  the  house  tax  as  a 
convenient  form  of  local  impost.  It  is,  indeed,  somewhat 
more  complicated  in  its  operation  ;  its  incidence,  which,  by 
regarding  houses  as  a  particular  manufactured  commodity, 
would  appear  to  be  on  the  occupier,  really  varies  according 
to  local  conditions,  and  it  has  the  disadvantage  of  affecting 
one  of  the  most  important  elements  of  necessary  expense  2, 
but  on  the  other  hand  it  is  easily  collected,  tolerably  pro- 
portional to  income,  and  does  not  touch  those  unconnected 
with  the  district.  If  houses  are  to  be  taxed  the  revenue 
thence  derived  should,  we  believe,  go  to  the  local,  not  to  the 
general  revenue.  The  same  reasons  that  have  been  noticed 
in  the  case  of  land  apply,  but  with  less  force,  to  that  of 
houses.  This  form  of  property  gains  in  value  by  expend i- 

1  Cp.  Report  of  Town  Holdings  Committee  (1891^),  Questions  176-180. 
z  See  Bk.  iv.  ch.  2.  §  5  for  a  discussion  of  the  incidence  of  house  taxes. 


CHAP.  VI.]      THE   PRINCIPLES   OF   LOCAL  TAXATION.  363 

'  ture,  but  it  also  deteriorates  through  use,  and  therefore  the 
indeterminate  portion  of  the  tax  that  falls  on  the  house- 
owner  should  be  kept  within  moderate  bounds. 

A  third  form  of  local  taxation  is  discovered  in  the  taxes  J^ 
on  the  exercise  of  occupations  known  as  '  licenses.'  These 
are  far  better  suited  for  local,  than  for  general,  taxation. 
They  can  be  collected  readily,  and,  if  properly  selected,  do 
not  hamper  industry.  The  system  of  low  license  duties  on 
most  trades  and  employments  has  the  chief  attributes  of  a 
fair  local  tax.  The  English  method  of  appropriating  the 
spirit  licenses  to  the  local  bodies  might  with  advantage  be 
further  developed. 

Very  similar  in  outward  appearance  are  the  licenses  for  \  ^ 
direct  enjoyments,  and,  though  they  differ  in  their  essential 
character,  they  also  may  without  impropriety  be  assigned 
to  the  several  localities.  Certain  difficulties  do  indeed 
arise  in  this  connexion.  A  license  taken  out  in  one  place 
may  be  required  for  use  elsewhere,  or  may  even  be  exer- 
cised in  several  different  localities.  In  practice  the  right 
of  transfer  may  be  allowed,  or  better  still,  such  cases  may 
be  reserved  for  the  central  revenue,  leaving  only  the  localized 
privileges  to  the  smaller  bodies.  As  a  further  resource 
some  of  the  taxes  on  acts  may  be  usefully  employed  by 
localities.  Thus  the  transfer  of  property,  registration  of 
companies,  and  other  charges  on  legal  transactions,  would 
provide  a  fund  for  the  payment  of  the  expenses  connected 
with  these  administrative  functions.  Those  taxes  that 
closely  resemble  fees  will  come  under  the  same  rule  as  to 
their  division  *.  Each  administration  will  take  for  itself 
what  it  collects. 

The  foregoing  suggested  distribution  must  necessarily  be 
modified  to  suit  the  needs  of  particular  financial  systems. 
Thus  the  house  tax  forms  a  part  of  general  taxation  in 
several  countries  :  its  complete  surrender  to  the  local 
authorities  when  proposed  in  England  was  made  contingent 
on  the  position  of  imperial  Finance,  and  has  not  yet  been 
1  Bk.  ii.  ch.  5.  §  3. 


364  PUBLIC   FINANCE.  [BOOK  III. 

carried  out1.  We  cannot  imagine  the  Indian  Government 
yielding  up  a  part  of  the  land  revenue  to  the  provinces. 
The  line  of  division  has  to  be  varied,  but  it  is  nevertheless 
well  to  know  the  general  principles  that  should  assist  in 
determining  it. 

§  5.  But  given  the  partition  of  revenue  between  the  two 
forms,  we  have  next  to  see  whether  the  rule  of  justice  that 
we  accepted  for  general  taxation  can  be  applied  without 
reservation  in  local  Finance.  Taxation  in  proportion  to 
income  gives  a  substantially  just  division  of  general  burdens, 
but  in  the  case  of  smaller  districts  the  burden  is  not  a 
general  one.  Most  local  services  are  specific,  and  can  be  > 
dealt  with  on  the  rule  of  payment  for  service.  A  large 
part  of  the  so-called  English  *  rates,'  such  as  those  for  water 
supply,  lighting,  cleaning,  drainage,  &c.,  may  best  be  mea- 
sured for  each  payer  by  the  benefit,  or  rather  the  quantity 
of  the  service.  .The  citizen  in  fact  pays  for  the  supply  of 
so  many  useful  commodities.  The  local  authority  is  per- 
forming a  strictly  economic  duty.  Taxation  so  far  l' 
should  be  in  proportion  to  advantage.  Difficulties,  how- 
ever, soon  arise  in  the  attempt  to  apply  this  principle.  In 
addition  to  the  direct  service  rendered  there  is  a  margin  of 
advantage  accruing  to  the  whole  society,  and  part  of  the 
service  is  not  done  for  specified  persons.  The  necessity  of 
investing  capital,  the  repayment  of  which  is  spread  over  a 
long  period,  complicates  the  case.  To  get  a  fair  division 
of  the  charge  between  owners  of  land,  possessors  of  fixed 
capital,  including  houses,  and  the  immediate  users  of  these 
public  services,  is  no  easy  task.  It  involves  (i)  a  deter- 
mination of  the  real  incidence  of  the  different  modes  of 
taxation,  and  of  the  extent  and  rapidity  of  the  process  of 
shifting ;  (2)  an  estimation  of  the  truly  equitable  division 
between  the  several  interests  ;  and  (3)  a  full  recognition  of 
the  practical  limits  that  any  effective  system  must  observe. 

1  Goschen,  Local  Taxation,  205  :  '  It  may  happen  that  owing  to  events  at 
present  unforeseen,  it  will  be  impossible  for  the  Imperial  Exchequer  to  part 
with  so  important  a  source  of  revenue  as  the  house  tax.' 


CHAP.  VI.]      THE    PRINCIPLES   OF   LOCAL  TAXATION.  365 

As  regards  the  first  it  depends  partly  on  the  general  prin- 
ciples of  incidence,  and  partly  on  the  special  incidence  of 
land,  house  and  capital  taxes.  For  convenience  we  may 
here  so  far  repeat  and  anticipate  the  results  elsewhere 
stated  l. 

The  immediate  consumer,  i.  e.  the  occupier  of  a  house  or 
the  user  of  other  taxed  convenience,  looks  on  local  taxation 
as  simply  a  part  of  the  price  of  the  utilities  he  receives. 
So  far  as  the  outlay  benefits  him  directly,  he  bears  it  as 
payment  for  increased  advantage,  and  taxation  is  only 
shifted  by  him  when  the  sacrifice  it  imposes  reduces 
demand.  Heavy  local  taxation,  unaccompanied  by  corre- 
sponding increase  in  utility,  would  tend  to  diminish  demand 
for  the  services  so  charged,  and  give  a  backward  shifting 
on  the  producers,  i.  e.  the  house-owners  or  other  holders  of 
the  articles.  The  check  to  these  particular  forms  of  industry 
would  ultimately  reduce  the  capital  and  labour  employed 
in  them,  and  thereby  pass  the  pressure  on  to  the  landowners 
in  the  shape  of  lowered  ground  rents  so  far  as  land  entered 
into  the  supply  of  services.  Such  seems  to  be  the  process 
by  which  the  '  orthodox '  views  on  the  incidence  of  rates 
were  arrived  at,  the  burden  being  ultimately  distributed 
between  the  owner  of  land  and  the  consumer.  In  respect 
to  taxes  on  agricultural  tenants  the  same  train  of  reasoning 
would  suggest  that  the  incidence  would  be  ultimately  on 
the  landlords,  as  outside  competition  would  hinder  any  for- 
ward movement  to  the  consumer  of  produce2.  It  is  hardly 
necessary  to  say  that  this  doctrine  assumes  a  uniformity  in 
the  course  of  shifting  that  has  no  real  existence,  since  it 
omits  some  circumstances  that  are  essential  elements  in  the 
problem.  Amongst  these  are :  the  long  duration  of  the 
arrangements  between  owners  of  land  and  of  capital ;  the 

1  See  Bk.  iii.  ch.  5.  §§  5,  6,  7  ;  Bk.  iv.  ch.  i.  §  6 ;  ch.  2.  §  5. 

2  On  the  question  of  incidence  see  Goschen,  Local  Taxation,  163-168,  and 
'CoA  fifth  Report  of  the  Committee  on  Town  Holdings,  No.  341  (1890),  especially 
Questions  41-5,  88-101,   331   (Sidney  Webb) ;   1804-32,   2024-26  (Munro) ; 
1243-46  (Farrer) ;  2714-22  (Rogers). 


366  PUBLIC    FINANCE.  [BOOK  III. 

position  of  qualified  monopoly  that  owners  of  land  in  towns 
possess,  and  which  with  its  advantages  has  the  disadvantage 
of  exposing  them  to  the  action  of  shifting  ;  the  slowness 
with  which  adjustments  are  made,  which  hinders  much 
reliance  in  matters  of  legislation  being  placed  on  the  opera- 
tion of  shifting  in  securing  a  proper  division  of  the 
burdens. 

The  second  difficulty  as  to  the  true  interpretation  of 
equity  is  partly  the  result  of  the  complicated  interests, 
some  present,  some  future,  that  modern  society  is  ever 
creating.  In  apportioning  taxation  between  occupier, 
houseowner  and  ground  landlord,  we  may  discover  that 
each  of  the  two  latter  interests  is  divided  into  three  or  four 
parts,  all  in  equity  bound  to  share  in  the  burden  for  the 
common  advantage.  Far  more  is  it  due  to  the  multiple 
duties  of  local  government,  some  of  which  are  merely  dele- 
gated for  convenience,  not  because  they  are  solely  of  local 
interest.  Police,  prisons,  poor  relief,  and  education,  may  be 
cited  as  examples.  We  cannot  with  any  reason  ,  maintain 
that  owners,  whether  of  land  or  other  property,  and 
ordinary  householders,  are  alone  interested  in  the  efficient 
management  of  these  important  matters.  The  policy  of 
defraying  all  these  charges  out  of  particular  funds  with  the 
practical  exemption  of  others  no  less  liable  is  a  grave 
injustice.  The  cost  of  expenditure  that  is  in  essence  for 
general  purposes  should  follow  the  same  distribution  as  that 
of  general  taxation. 

An  opposite  case  is  that  in  which  outlay  is  incurred  for 
the  benefit  of  particular  owners.  They  may  fairly  be  called 
on  to  pay  for  this  special  advantage.  The  'betterment' 
principle  has  thus  a  foundation  in  justice.  The  community 
charges  for  the  service  it  has  performed,  but  its  action 
requires  to  be  carefully  controlled  ;  the  proof  of  benefit 
bestowed  must  be  very  plain  and  well  established,  and  the 
indirect  benefits  to  others  must  be  taken  into  account.  The 
owners  of  building  plots  and  houses  in  an  improved  street 
gain  largely,  so  however,  in  a  less  degree,  does  the  general 


CHAP.  VI.]      THE   PRINCIPLES   OF   LOCAL  TAXATION.  367 

community.  The  rule  then  of  taxing  according  to  interest 
affected  is  not  a  complete  and  absolitfee"principle  for  the 
distribution  of  local  Finance.  Certain  forms  of  direct  public 
services  can  be  so  dealt  with  as  well  as  the  special  im- 
provements of  private  property.  Another  portion  may  be 
fairly  placed  on  the  owners  of  durable  property  as  those 
who  benefit  most  by  an  active  and  judicious  local  ad- 
ministration. A  third  and  not  inconsiderable  share  may 
be  placed  on  the  community  generally  by  the  agency  of 
local  licenses  and  taxes  on  transactions,  and  still  .more  by  a 
tax  proportional  to  house  rent  which  is  a  good  rough 
measure  of  taxable  capacity  *. 

§  6.  After  all  these  different  expedients  have  been  car- 
ried as  far  as  circumstances  will  allow,  it  may  be  necessary 
to  readjust  the  balance  between  the  central  and  local 
governments  by  a  transfer  from  the  funds  of  the  former,* 
or  by  the  employment  of  its  taxes  as  a  base  on  which  to 
raise  additional  local  resources. 

Most  systems  of  Finance  have  adopted  one  or  both  of 
these  expedients.  To  begin  at  home  :  for  many  years  it 
had  been  the  established  practice  to  pay  local  authorities 
various  sums  for  special  objects  to  be  applied  in  the 
manner  prescribed  by  Parliament  or  some  branch  of  the 
central  administration.  In  common  with  other  expenditure 
these  grants  increased  in  amount  till  they  reached  six 
millions  in  1887.  The  result  was  a  confusion  between  the 
two  classes  of  revenue  and  expenditure  :  what  was  outlay 
in  one  case  was  income  in  the  other,  the  same  sums  being 
counted  twice  over.  The  method  of  assigning  particular 
taxes  or  portions  of  them  to  local  authorities  is  plainly  a 
great  improvement.  Under  the  new  plan  introduced  by 
Mr.  Goschen  various  duties  have  been  directly  marked  off 
for  local  revenue,  and  thereby  removed  from  the  imperial 

1  *  It  is  one  of  the  fairest  and  most  unobjectionable  of  all  taxes.  No  part  of 
a  person's  expenditure  is  a  better  criterion  of  his  means  or  bears  on  the  whole 
more  nearly  the  same  proportion  to  them,'  Mill,  Principles,  Bk.  v.  ch.  3.  §  6. 
Supported  by  Engel's  researches. 


368  PUBLIC    FINANCE.  [BOOK  III. 

budget l.  The  advantage  of  a  distinct  line  being  drawn, 
and  of  making  the  local  receipts  depend  on  the  product  of 
the  duties,  not  on  the  pressure  brought  to  bear  on  the 
government,  is  undoubted.  The  same  policy  has  been  tried 
elsewhere.  Belgium  removed  the  octrois  in  1860,  and  re- 
placed them  by  parts  of  several  indirect  taxes2.  This 
method  receives  an  extension  by  making  the  local  taxes 
merely  additions  to  the  general  ones.  Thus  the  French 
communes  and  departments  draw  their  principal  tax  revenue 
from  the  '  Centimes  additionnelsl  i.  e.  charges  added  to  the 
four  direct  contributions.  The  same  plan  is  used  in  Ger- 
many and  Austria,  though  independent  communal  taxes 
are  found  in  various  cases  in  the  former. 

Some  high  authorities  approve  of  this  policy  of  making 
local  taxation  a  mere  appendage  to  general  taxation.  *  It 
is  rightly  asserted,'  says  Leroy  Beaulieu,  '  that  the  French 
system  of  movable  additional  charges  on  the  existing  direct 
contributions,  of  uniform  accountability,  and  the  collection 
of  direct  local  taxes  by  the  agents  of  the  State,  makes  the 
management  of  local  Finance  simpler,  clearer  and  less  costly, 
and  gives  the  taxpayers  much  greater  security  against 
peculation  and  exaction.  We  do  not  hesitate  for  our  part  to 
declare  for  that  system  V  But  notwithstanding  this  weighty 
judgment  we  are  forced  to  believe  that  there  is  an  advantage 
in  having  a  separate  system  of  local  taxation.  The  aims  of 
the  two  classes  are  so  different,  and  the  rule  of  distribution 
varies  so  much,  that  a  decided  boundary  between  them  is 
rather  desirable.  Both  will  naturally  avail  themselves  of  such 
material  in  the  shape  of  valuations  and  officials  as  exist, 
but  this  does  not  necessitate  the  treatment  of  local  taxes  as 
merely  added  percentages  to  established  general  taxes. 

1  These   are  (i)  the   license   duties;    (2)   a  proportion    (one-half)   of  the 
probate  duty;  (3)  6d.  per  gallon  on  spirits  and  ^d.  per  barrel  on  beer,  i.e. 
taxes  on  acts,  property  and  commodities. 

2  75  per  cent,  of  the  coffee  duty,  25  per  cent,  of  the  spirit  duties,  the  excises 
on  sugar  and  wine,  and  40  per  cent,  of  the  postal  receipts.     See  De  Parieu,  iv. 
386  sq.  for  a  full  discussion. 

3  i.  712. 


CHAP.  VI.]      THE    PRINCIPLES   OF   LOCAL   TAXATION.  369 

The  success  of  local  government  depends  on  the  energy 
and  vigour  with  which  it  is  worked,  not  on  restraining  its 
action  within  the  narrowest  limits.  '  The  ideal  condition 
of  Finance  in  a  perfect  system  of  local  self-government '  has 
been  described  as  '  one  in  which  each  local  authority  levies 
its  own  taxes  upon  its  own  subjects  within  its  own  area  ; 
in  which  it  has  the  power  of  applying  the  proceeds  of  these 
taxes,  within  certain  limits  fixed  by  the  general  law,  for  the 
local  advantage  of  its  own  citizens  ;  and  in  which  it  has 
power  to  increase  or  diminish  its  taxes,  at  its  own  discretion, 
according  to  its  means  and  its  wants1.'  The  benefits  of 
fiscal  autonomy  may  perhaps  not  be  so  great  as  in  certain 
conditions  to  compensate  for  the  want  of  harmony  and 
regularity  that  state  intervention  secures  ;  they  are,  how- 
ever, sufficient,  in  conjunction  with  the  reasons  already 
given,  to  justify  strenuous  efforts  for  securing  a  distinct  tax 
system,  and  this  is  possible  without  any  sacrifice  of  the 
guarantees  for  good  government.  At  the  same  time  we 
may  fully  recognise  the  convenience  of  supplementing  local 
revenue  from  general  taxation  with  the  double  object  of 
securing  sufficient  funds  and  more  equitable  distribution 
of  burdens,  though,  while  granting  this,  we  must  also  insist 
that  the  extent  to  which  the  process  is  applied  ought  to  be 
confined  within  the  narrowest  limits  consistent  with  attain- 
ing the  end  in  view.  The  allotment  of  part  of  the  taxation 
available  to  meet  the  general  expenditure  is  a  measure  that 
always  stands  in  need  of  justification  ;  it  has  a  presumption 
against  it  only  capable  of  being  rebutted  by  sufficient 
evidence. 

§  7.  The  relations  of  local  and  general  Finance  suggest 
another  closely  related  point,  viz.  the  extent  of  the  fiscal 
liberty  to  be  bestowed  on  the  local  financial  powers.  Be- 
tween the  extremes  of  complete  regulation  and  almost 
complete  independence  we  may  discover  a  series  of  steps 
corresponding  to  the  size  of  the  bodies  and  the  political 

1  Sir  T.  H.  Farrer,  Mr.  Gosc hen's  Finance ,  54. 

B  b 


370  PUBLIC    FINANCE.  [BOOK  III. 

training  of  the  people.  The  national  government  may  fix 
the  particular  taxes  and  their  amount,  or  it  may,  as  with 
the  French  communes^  let  the  latter  be  varied  if  its  permis- 
sion is  sought.  Again,  it  may  lay  down  the  forms  of 
taxation  and  place  bounds  to  its  amount,  either  definitely 
determined  or  variable.  Or,  finally,  the  duty  of  selecting 
both  the  taxes  and  determining  their  amount  may  be  given 
up  to  the  local  government.  The  first  mode  means  the 
reduction  of  the  local  authority  to  impotence  so  far  as 
taxation  is  concerned  ;  it  simply  executes  the  Sovereign's 
orders.  The  other  extreme  approaches  closely  to  inde- 
pendence. The  taxing  power  is  always  an  attribute  of 
sovereignty ;  a  body  that  had  full  taxing  power  would 
have  got  very  near  that  position.  Accordingly  we  find  that 
the  customs  duties  in  all  federal  States  come  under  the 
control  of  the  central  government.  The  extent  to  which 
the  right  of  independent  taxation  has  been  restrained  is  a 
mark  of  the  progress  of  the  State  towards  unity.  Co-ordi- 
nate fiscal  authorities  have  to  be  kept  within  bounds  by 
constitutional  rules,  but  we  may  safely  conclude  that  in  a 
durable  State  the  supreme  power  in  financial  matters  will 
sooner  or  later  be  vested  in  the  central  government. 

The  extent  to  which  the  liberty  of  experiments  in  taxa- 
tion should  be  conceded  to  the  subordinate  bodies  must, 
we  believe,  be  carefully  limited.  For  the  smaller  units  the 
taxes  should  be  absolutely  laid  down,  and  also  the  maxi- 
mum to  be  raised,  but  the  opportunity  of  economy  should 
not  be  denied  them  on  the  condition  that  they  duly  dis- 
charge their  necessary  functions1.  The  larger  circumscrip- 
tions are  fairly  entitled  to  greater  latitude.  A  higher 
standard  of  intelligence  may  be  expected  from  their  repre- 
sentatives, and  their  economic  resources  are  more  varied. 
But  even  with  them  the  need  for  supervision  cannot  be  said 
to  be  absent.  They  may  impose  taxes  that  press  heavily  on 
unpopular  sections  in  their  district;  they  may  deal  unjustly 
or  ignorantly  with  important  economic  and  social  interests, 

1  Bk.  i.  ch.  7.  §  9  for  these  duties. 


CHAP.  VI.]      THE   PRINCIPLES   OF   LOCAL  TAXATION.  371 

or  they  may  go  counter  to  the  financial  policy  of  the  State. 
For  these  reasons  the  unitary  form  of  government  is  in  its 
financial  aspects  superior  to  the  federal  one,  even  though 
the  larger  liberty  of  levying  new  varieties  of  taxation  is  a 
certain  advantage  in  the  latter. 


B  b 


APPENDIX. 
THE  MAXIMS  OF  TAXATION. 

THE  recurring  needs  of  financial  practice  would  naturally 
suggest  to  those  concerned  with  the  collection  of  public  revenue 
the  advisability  of  framing  general  rules  by  which  to  guide  their 
policy.  Art  usually  precedes  and  is  the  parent  of  science,  and 
Finance  is  hardly  an  exception  in  this  respect.  Unfortun- 
ately the  limitation  of  the  administrators'  views  to  the  object 
of  securing  the  largest  immediate  return,  their  ignorance  of  the 
simplest  economic  principles,  and  the  immature  condition  of  the 
early  state  economy,  all  made  the  process  a  slow  one.  The 
most  famous  financiers  of  so  relatively  modern  a  period  as  the 
seventeenth  century — Sully  and  Colbert — left  little  in  the  form 
of  applicable  general  rules.  The  first  really  meritorious  col- 
lections are  those  of  the  students  of  economics  and  administra- 
tion in  the  eighteenth  century.  In  Germany,  Italy,  and  France 
this  work  was  performed  with  more  or  less  acuteness,  but  the 
writings  of  the  cameralists  and  Italian  economists  have  chiefly  an 
historical  interest,  while  the  doctrine  of  the  net  product  vitiated 
the  physiocratic  conclusions 1. 

Adam  Smith's  fortune  has  been  very  different  in  this  respect. 
His  canons  were  accepted  in  his  own  day  by  theorists  and 
statesmen,  and  have  been  so  worked  into  the  texture  of  financial 
science  that  no  work  on  the  subject  can  rightly  omit  them.  Fully 
in  harmony  with  the  spirit  of  the  last  century,  they  have  survived 

1  For  the  maxims  of  earlier  writers  see  Roscher,  §  44,  note  I.  Those  of 
Justi  in  his  System,  and  Verri,  Meditazioni,  are  the  most  noticeable.  As  to  the 
anticipations  of  Adam  Smith's  first  rule  see  Held,  Einkommensteuer,  121  sq., 
and  Meyer,  Principien,  3-21. 


APP.]  THE   MAXIMS   OF   TAXATION.  373 

in  the  development  of  the  present,  and,  in-spite  of  much  hostile 
criticism,  bid  fair  to  hold  their  ground  in  the  future 1. 

These  famous  maxims — to  once  more  repeat  them — are  four  in 
number  and  run  as  follows  : — 

(1)  '  The  subjects  of  every  State  ought  to  contribute  towards  the 
support  of  the  government  as  nearly  as  possible  in  proportion  to 
their  respective  abilities;    that  is,  in  proportion  to  the  revenue 
which  they  respectively  enjoy  under  the  protection  of  the  State.' 

(2)  '  The  tax  which  each  individual  is  bound  to  pay  ought  to 
be  certain  and  not  arbitrary.     The  form  of  payment,  the  man 

of  payment,  the  quantity  to  be  paid  ought  all  to  be  clear  and 
plain  to  the  contributor  and  to  every  other  person.' 

(3)  *  Every  tax  ought  to  be  levied  at  the  time  or  in  the  manner  „ 
in  which  it  is  most  likely  to  be  convenient  for  the  contributor  to 
pay  it.' 

(4)  '  Every  tax  ought  to  be  so  contrived  as  both  to  take  out  s^ 
and  to  keep  out  of  the  pockets  of  the  people  as  little  as  possible, 
over  and  above  what  it  brings  into  the  public  treasury  of  the 
State2.' 

The  most  obvious  comment  on  these  rules  is  that  which  notes 
a  difference  between  the  first  and  the  remaining  ones.  The 
former  is  a  rule  of  taxation ;  the  latter  are  rules  respecting  taxes. 
The  first  canon  is  applicable  only  to  the  tax  system  as  a  whole, 
while  the  second,  third  and  fourth  should  be  observed  in  the 
case  of  each  separate  tax.  Mill,  therefore,  has  some  justification 
when  he  declares  that  they  belong  to  '  the  discussion  of  particular 
taxes ' 3  since  every  tax  must  be  separately  tested  by  them,  though 
of  course  this  circumstance  does  not  remove  them  from  the 
category  of  general  rules. 

Another  feature  that  has  been  often  noticed  is  the  mixture\ 
of  different  classes  of  considerations.  Thus  they  have  been 

1  Between  the  view  of  J.  S.  Mill,  who  calls  the  Smithiau  maxims  *  classical,' 
and  the  undue  depreciation  of  President  Walker  and  Cohn,  the  former  is  much 
nearer  the  truth.     According  to  President  Walker  '  These  maxims  have  been 
quoted  over  and  over  again  as  if  they  contained  truths  of  great  moment,  yet  if 
one  examines  them  he  finds  them  at  the  best  trivial,  while  the  first  and  most 
famous  cannot  be  subjected  to  the  slightest  test  without  going  all. to  pieces/ 
Pol.  EC.  489.    Cohn,  §  333,  is  quite  as  severe. 

2  Wealth  of  Nations,  347-8. 

3  Principles,  Bk.  v.  ch.  2.  §  i. 


374  PUBLIC    FINANCE.  [BOOK  III. 

described  as  '  partly  ethical  .  .  .  and  partly  economical  in  the  strict 
sense '  * ;  and  it  seems  unquestionable  that  the  second  has  chiefly 
a  constitutional  significance,  as  prescribing  the  taxpayer's  immunity 
from  arbitrary  exactions,  but  more  generally  the  three  last  may 
be  regarded  with  Wagner  as  '  administrative  precepts ' 2. 

The  suggested  separation  of  the  Smithian  rules  according  to 
their  character,  though  in  form  correct,  has  the  effect  of  obscuring 
unduly  their  really  compound  basis.  The  first  maxim  is,  it  may 
be  said,  undoubtedly  ethical,  since  it  refers  to  the  justice  of 
taxation.  Granting  this,  it  should  be  also  remembered  that 
inequality  in  taxation  diminishes  its  productiveness  and  tends  to 
impair  industrial  energy ;  from  this  point  of  view  the  canon  is  an 
economic  one.  Violations  of  the  rule  of  equal  treatment  are, 
again,  offences  against  constitutional  liberty  quite  as  much  as 
absence  of  certainty.  In  like  manner  each  of  the  remaining  rules 
has  an  economic  side;  the  certainty,  the  convenience,  and  the 
economy  of  taxation,  like  its  equality,  are  highly  promotive 
of  a  well-filled  treasury  and  a  prosperous  industrial  system. 
The  true  point  of  view  for  understanding  these  maxims  is  to 
regard  them  not  as  economic,  ethical  or  constitutional,  but  as 
essentially  financial '•  they  therefore  rightly  combine  the  dif- 
ferent elements  that  must  enter  into  problems  connected  with 
that  subject. 

With  reference  to  the  first  maxim  it  is  plain  that  Adam  Smith 
regarded  revenue  as  the  index  of  ability  to  contribute,  and  it  may 
be  conjectured  that  the  words  '  under  the  protection  of  the  State ' 
refer  to  the  case  of  persons  having  property  in  different  countries, 
and  therefore  imply  a  prohibition  of  double  taxation 3.  The  con- 
sideration of  the  tests  of  justice  finds  its  place  in  the  general 
exposition,  not  in  an  historical  appendix. 

Next  to  Adam  Smith,  Sismondi  deserves  mention  as  the  pro- 
pounder  of  rules  that  have  a  real  value ;  they  also  are  four,  and 
assert : — 

(1)  'Every  tax  should  fall  on  revenue,  not  on  capital.' 

(2)  '  In  the  assessment  of  taxation  gross  produce  should  not  be 
confounded  with  revenue.' 

1  Nicholson,  note  45  to  Wealth  of  Nations,  418. 

2  Cp.  Sidgwick,  Pol.  EC.  Bk.  iii.  ch.  8.  §  6 ;  Wagner,  ii.  292. 

•:  See  Bk.  iii.  ch.  3.  §  14,  and  the  works  there  referred  for  this  discussion. 


APP.]  THE   MAXIMS  OF  TAXATION.  375 

(3)  'Taxation  should  never  touch  whatrls^necessary  for  the 
existence  of  the  contributor.' 

(4)  '  Taxation  should  not  put  to  flight  the  wealth  on  which  it  is 
imposed  V 

These  rules  are  the  practical  application  of  the  ideas  of  net 
produce,  and  the  relief  of  the  minimum  of  subsistence,  and  they 
prove  that  in  Finance  Sismondi  had  not  deviated  from  the 
Ricardian  position. 

The  succeeding  writers  in  England,  France  and  Germany 
employed  the  maxims  of  Adam  Smith  as  the  basis  of  their 
discussions :  the  particular  variations  in  expression  of  different 
authors  need  not  be  noticed. 

Among  French  expositors  of  Finance  the  series  of  rules  given 
by  Joseph  Gamier 2  is  the  most  elaborate.  Of  his  sixteen  rules 
the  third  and  fourth  correspond  to  Adam  Smith's  second  and 
fourth.  The  first  and  sixth  together  deal  with  distribution  of 
taxation,  which  ought,  he  holds,  to  be  'progressively  propor- 
tional.' The  remaining  rules  are  chiefly  political  or  technical, 
as  e.g.  the  ninth  which  declares  that  taxation  should  be  voted 
by  the  representatives  of  the  taxpayers,  and  the  fifteenth 
limiting  indirect  taxation  to  a  small  number  of  articles.  Far 
superior  in  arrangement  and  clearness  is  the  grouping  of  Hock 
who  lays  down  that  taxation  should  be:  (i)  just,  (2)  logical, 
and  (3)  economical,  developing  each  of  these  chief  heads  in 
special  subdivisions. 

The  newer  financial  literature  has  not  sought  so  much  to  formu- 
late short  general  rules  of  universal  validity,  as  to  analyse  and 
consider  the  conditions  suitable  to  the  several  stages  of  the  tax- 
system.  But  analysis  and  discussion  must,  if  fruitful,  be  the 
foundation  of  general  precepts,  and  accordingly  we  find  that  in 
some  cases  the  attempt  has  been  made.  Held's  very  careful 
discussion  of  the  sources  of  taxation  leads  him  to  the  assertion 
of  three  principles  of  distribution;  viz.  '  (i)  Generality,  i.e.  all 
who  have  incomes  should  pay.  (2)  Equality,  i.  e.  income  should 
be  taxed  without  reference  to  its  source.  (3)  The  greatest 
possible  care  of  the  national  well-being  and  its  increase3.'  The 

1  Nouveaux  Principes  (2nd  ed.),  Livre  vi.  ch.  8. 

2  Finance  (4th  ed.),  ch.  13,  156-165. 

3  Einkommcnstciier,  121, 


376  PUBLIC  FINANCE.  [BOOK  III. 

last  includes  the  maxim  of  economy.  A  re-statement  of  the 
canons  of  Finance  according  to  the  latest  view  is  supplied  by 
Wagner.  Rejecting  the  idea  of  a  single  class  of  rules  of  co-or- 
dinate authority  he  divides  the  chief  principles  (oberste  Grundsatze) 
into  four  classes  arranged  in  the  order  of  their  importance,  and 
distinguished  as  (a)  financial,  (fr)  economic,  (c)  ethical,  (d)  ad- 
ministrative. Under  (a)  come  (i)  taxation  should  be  adequate  to 
meet  expenditure,  (2)  it  should  be  elastic;  under  (b)  are  placed 
(3)  the  sources  of  taxation  should  be  rightly  chosen,  (4)  the  kinds 
of  taxes  should  be  selected  with  reference  to  their  effects  ;  class  (c] 
includes  rules  (5)  taxation  should  be  general,  and  (6)  it  should 
be  proportional ;  while,  finally,  class  (d)  contains  the  rules  that 
taxation  should  be  (7)  determinate,  (8)  convenient,  and  (9)  col- 
lected with  the  smallest  cost,  in  fact  Adam  Smith's  last  three 
maxims  1. 

The  economic  rules  are  somewhat  vaguely  expressed,  but  (3) 
refers  to  the  taxation  of  income  and  of  capital,  and  (4)  draws 
attention  to  the  incidence  of  taxation.  The  sixth  rule  is  regarded 
as  varying  according  to  the  conception  taken;  from  the  pure 
financial  point  of  view  it  is  proportionality  to  income,  from  the 
politico-social  one  it  is  in  proportion  to  capacity. 

In  reality  Wagner's  principles  are  not  so  much  rules  in  the 
older  sense,  as  indications  of  the  points  to  be  considered  :  he  par- 
ticularly dwells  on  the  need  of  careful  discrimination  of  particular 
cases 2. 

1  Wagner,  ii.  304. 

2  '  Hier  muss  die  Finanzwissenschaft  vielmehr  specialise!!  und  casuistisch 
verfahren,  als  sie  bisher  gewohnlich  gethan  hat,'  ii.  305. 

The  latest  English  statement  of  the  maxims  of  taxation  is  that  by  Mr.  Devas 
who  lays  down  ten  conditions,  Pol.  EC.  516. 


BOOK 


PUBLIC    REVENUE. 
TAXATION.     THE  SEVERAL  KINDS  OF  TAXES. 


CHAPTER    I. 
TAXES  ON  LAND. 

§  1.  IN  the  preceding  book  we  have  dealt  with  the 
subject  of  taxation  under  its  general  aspects  as  the  most 
important  element  of  the  financial  system.  We  have  now 
to  complete  our  inquiry  by  examining  the  characteristics 
of  the  different  kinds  of  taxes,  and  we  may  begin  this 
discussion  with  one  of  the  oldest  and  most  widely  employed 
forms  of  compulsory  contribution — that  levied  on  land.  The 
interest  and  importance  of  this  kind  of  taxation  need  not 
be  insisted  on.  Perhaps  some  capitation  taxes  or  a  rude 
form  of  the  property  tax  can  claim  a  higher  antiquity,  but 
in  ancient,  mediaeval,  and  modern  times,  in  backward  and  in 
progressive  societies,  we  meet  with  something  in  the  shape 
of  taxation  on  land  as  one  of  the  primary  agents  of  pro- 
duction. The  economic  nature  of  the  impost  and  the  par- 
ticular methods  adopted  vary:  the  existence  of  some  form 
of  public  charges  on  land  is  almost  universal,  and  shows  no 
sign  of  decrease.  Greater  financial  knowledge  and  more 
efficient  regulations  produce  important  changes.  Indeed,  it 
is  this  development  that  chiefly  needs  our  attention.  From 
the  first  feeble  attempts  up  to  the  elaborate  processes  of 
modern  administration,  we  can  trace  progress  through  a 
series  of  stages  which  illustrate  the  historical  movement. 

§  2.  Regarding  land  itself  as  the  '  object '  to  be  taxed 
the  most  obvious  '  unit '  in  a  new  community  would  be  that 
of  a  given  area.  Assume  that  none  but  very  fertile  land  is 
cultivated  and  that  only  in  a  simple  manner,  and  the  tax 
by  area  will  be  also  the  just  one.  Each  unit  is  of  about 


380  PUBLIC    FINANCE.  [BOOK  IV. 

the  same  value  and  employs  about  the  same  amount  of 
capital  and  labour.  The  early  taxes  on  Jugera  in  Rome 
and  on  'hides'  in  England,  were  probably  at  first  based 
on  this  system,  though  they  soon  departed  from  it,  and  at 
present  a  few  of  the  English  dependencies  retain  it 1.  As 
soon  as  differences  in  quality  of  land  and  in  mode  of  culti- 
vation become  noticeable,  the  method  ceases  to  be  fair. 

Another  form  of  land  tax,  that  in  proportion  to  the 
produce,  is  of  greater  antiquity.  Eastern  Sovereigns  re- 
ceived their  revenue  usually  in  this  manner.  One-fourth, 
'  as  in  India,'  one-fifth,  'as  in  Egypt,'  or  one-tenth  of  the  yield 
was  claimed  by  the  monarch.  This  '  tithe  system,'  as  it 
may  be  called,  arose  out  of  the  ruler's  part-proprietorship 
of  the  soil.  The  proportional  tax  was  closely  analogous  to 
a  metayer  rent.  It  was  partly  adjusted  to  the  productive- 
ness of  the  land  and  did  not  press  so  heavily  on  the  poor 
soils  as  the  area  tax.  Under  a  competitive  system  its 
immediate  burden  would  fall  on  the  consumers  of  agricul- 
tural products  through  the  rise  of  price,  though  the  ultimate 
effect  would  be  to  check  cultivation,  and  therefore  to  lower 
rent.  As  the  system  has  been  generally  applied  to 
societies  in  the  customary  stage  the  pressure  came  on 
the  cultivator,  who  is  at  once  the  producer  and  the  chief 
consumer  of  those  commodities. 

These  primitive  methods  are  improved,  either  by  arrang- 
ing land  in  classes  according  to  its  fertility  and  applying  a 
different  rate  to  each  class,  or  by  altering  the  proportion 
of  produce  taken  according  to  the  method  of  cultivation. 
As  soon  as  the  elements  of  fertility  and  proximity  to 
market  begin  to  tell,  it  is  evident  that  a  uniform  rate  falls 
with  undue  severity  on  the  poor  and  distant  lands,  either 
hindering  their  cultivation  or  raising  the  value  of  all 
produce.  Consequently  we  meet  efforts  at  differentiation 
in  various  countries.  Under  the  Roman  Empire  land  in 

1  Dowell,  i.  8,  for  the  « hide.'  For  \hejugerum,  Mommsen,  Hist.  Rom.  i.  95. 
St.  Vincent  and  British  Guiana  have  the  uniform  tax,  Parl.  Papers  (1891),  181, 
Taxation  of  L  ami. 


CHAP.  I.]  TAXES   ON   LAND.  381 

some  provinces  was  divided  into  that  of  first,  second,  third, 
or  other  fertility,  and  the  rate  was  adjusted  accordingly  ; 
in  others  one-fifth  or  one- seventh  of  the  yield  was  taken  l. 
In  later  times  the  Duchy  of  Mecklenburg  had  -its  land 
graded  into  three  classes,  with  a  different  rate  on  each,  and 
some  of  the  Indian  assessments  have  a  like  idea  as  their 
base  2.  These  modifications  show  some  consciousness  that 
the  real  value  of  the  agent,  land  is  not  to  be  measured 
either  by  its  surface  area  or  its  gross  produce.  They  are, 
however,  but  imperfect  attempts  at  reaching  the  true  aim 
of  a  land  tax,  the  value  embodied  in  the  object.  A  tithe- 
or  other  proportional  produce  tax  does  not  allow  for  the 
expenses  of  production :  as  equal  amounts  of  produce  are 
often  due  to  very  different  quantities  of  outlay,  it  dis- 
courages the  employment  of  capital  and  is  practically  in- 
convenient in  the  form  of  assessment 3.  A  classification  of 
soils  gives  some,  but  insufficient  recognition  to  the  influence 
of  natural  fertility.  Far  more  is  required.  The  effort  to 
get  at  the  true  value  of  the  '  object '  is  attained  in  respect 
to  the  land  tax  when  it  is  levied  on  the  net  'yield.'  The 
capital  of  the  cultivator  and  the  profits  due  to  it  have  to  be 
estimated  in  order  to  get  the  income  derived  from  the  soil 
itself.  Political  equity  and  financial  expediency  have  both 
contributed  to  this  result ;  the  fairest  and  most  productive 
land  tax  is,  on  the  whole,  that  which  takes  the  net  return 
as  its  standard.  Fiscal  practice  tended  in  this^direction. 
The  financial  reform  of  Diocletian  seems  to  have  adopted  a 
unit  of  value,  not  of  area  (Juguni),  as  the  base  for  taxation 
of  land.  The  English  '  hide '  came  to  be  regarded  as  the 
'  carucate '  of  variable  area  but  constant  value  4. 

1  Clamageran,  i.  16. 

2  'Land  (in  Ohio)  was  divided  into  three  classes,  according  to  quality,  and 
there  were  three  rates  of  taxation  per  100  acres;    one  for  land  of  the  first 
quality,  another  for  land  of  the  second  quality,  and  still  another  for  land  of  the 
third  quality,'  Ely,  Taxation,  134. 

3  Restraints  must  be  placed  on  the  sale  of  crops  until  they  are  inspected  by 
the  tax-collector  and  his  share  settled. 

*  Wagner,  iii.  26  ;  Clamageran,  i.  19.    Seebohm,  English  Village  Community, 
290  sq.     For  England,  Seebohm,  40;  Dowell,  iii.  67. 


382  PUBLIC    FINANCE.  [BOOK  IV. 

The  mediaeval  land  taxes  are  so  much  mixed  up  with 
rent  and  the  incidents  of  tenure  that  little  stress  can  be 
placed  on  their  form  :  they  are  often  parts  of  the  older 
property  tax,  and  only  disentangled  from  it  by  degrees. 
Early  English  taxation  '  reached  the  landowner  through  his 
cattle,  farming  stock  and  corn  and  other  produce  of  lands 1/ 
and  the  later  subsidies  had  a  rate  on  land  as  one  of  their 
component  parts.  In  France  the  Taille  was  developed  from 
the  feudal  dues  and  became  permanent  in  1445.  But  wher- 
ever the  system  of  taxing  land  had  to  be  applied,  the  idea  of 
taking  its  value  as  the  real  object  of  taxation  came  to  the 
front,  though  the  difficulties  in  carrying  it  out  caused  the 
frequent  adoption  of  the  '  apportioned  '  tax,  as  in  the  case 
of  the  Taille ',  both  the  English  *  tenths  and  fifteenths,'  and 
the  subsidies,  as,  too,  the  German  and  Italian  land  taxes  2. 
The  defects  of  these  systems,  with  their  exemptions  and 
inequalities,  made  a  reform  essential. 

§  3.  It  is  far  easier  to  point  out  the  conditions  of  theoretic 
justice  than  to  overcome  the  obstacles  to  arriving  at  the 
true  net  yield.  The  land  tax  system  requires  as  its  basis 
a  valuation,  and  in  the  attempt  to  furnish  this  requisite 
various  methods  have  been  tried.  Perhaps  the  simplest  is 
that  which  follows  the  indications  of  the  market,  and  uses 
as  its  guide  the  rent  at  which  land  is  let.  There  is  an 
obvious  advantage  in  keeping  close  to  the  facts,  but  there 
is  also  great  difficulty  in  ascertaining  them  correctly  and 
following  their  successive  changes.  Adam  Smith  approved 
of  the  use  of  registers  of  leases,  which  he  would  make  com- 
pulsory, and  by  their  aid  assess  the  land  of  occupying 
owners  3.  The  selling  value  is  another  possible  criterion ;  it 
is  evidently  related  to  rent  as  principal  to  interest,  and  for 
short  periods  the  proportion  is  steady.  A  tax  directly 
based  on  the  sale  value  of  land  is,  however,  a  tax  on  pro- 
perty rather  than  income. 

The  difficulties  in  ascertaining  the  actual  rents,  and  in 

1  Dowell,  i.  59.  2  Vignes,  i.  n ;  Dowell,  i.  88,  154. 

3   Wealth  of  Nations,  349-50. 


CHAP.  I.]  TAXES   ON    LAND.  383 

some  countries  the  large  proportion  of  occupying  owners 
have  popularized  the  system  of  determining  the  value  of 
land  for  taxation  by  official  assessment  based  on  survey 
and  valuation.  This  method  is  evidently  the  older.  The 
Roman  provincial  land  tax  had  a  survey  as  its  foundation, 
followed  by  valuation  l.  Domesday  Book  is  a  less  perfect 
example  of  the  same  kind  in  England,  and  in  one  form  or 
another  valuations  were  common  enough  in  the  Middle 
Ages,  but  were  in  general  used  only  for  the  ruder  forms  of 
land  taxation,  and  dealt  with  the  gross  produce  from  the 
soil  or  its  supposed  capital  value. 

Refinements  in  fiscal  methods  require  a  corresponding 
elaboration  in  the  valuation  or,  to  use  the  serviceable 
French  term,  the  cadastre  2  on  which  they  depend.  Most 
of  the  controversies  about  the  land  tax  turn  on  the  method 
of  cadastration  and  the  expediency  of  its  revision  at  stated 
periods.  For  the  completion  of  a  cadastre  a  series  of  pro- 
cesses is  needed  :  there  must  be  the  measurement  of  the 
surface  and  its  delineation  by  maps,  with  the  boundaries  of 
properties  marked,  and  the  ownership  specified.  To  this 
technical  work  the  economic  task  of  valuation  succeeds. 
Estimates  of  produce  and  prices  and  of  the  cost  of  cultiva- 
tion form  the  data  on  which  the  '  net  annual  value '  is 
arrived  at.  Each  of  these  steps  involves  much  labour,  and 
is  liable  to  error,  more  particularly  in  the  economic  part  of 
the  work.  Produce  must  depend  on  the  method  and  skill 
employed  in  cultivation,  prices  on  many  different  con- 
ditions, and  both,  especially  the  latter,  are  fluctuating. 
Besides,  to  be  really  useful,  a  fiscal  survey  must  deal  with 
minute  portions  of  the  soil ;  each  distinct  piece  (w  pare e lie) 
should  be  valued  and  revalued  after  an  interval.  Such  an 
inquiry  takes  a  long  period  to  accomplish  for  any  country, 
and  by  the  time  it  is  completed  the  results  for  the  districts 
first  treated  have  become  antiquated3.  However  perfect 

1  Wagner,  iii.  25-6.  2  Said  to  be  derived  from  '  capistratum? 

3  '  The  survey  and  valuation  of  Bohemia  is  said  to  have  been  the  work  of 
more  than  a  hundred  years,'  Wealth  of  Nations,  351.     The  French  Cadastre, 


384  PUBLIC   FINANCE.  [BOOK  IV. 

when  first  started,  a  valuation  must  soon  fail  to  represent 
the  actual  position  of  the  land  it  deals  with.  The  opening 
of  new  lines  of  communication,  the  adoption  of  a  different 
style  of  farming,  and  the  growth  of  towns  will  completely 
alter  the  old  results  1.  The  imperfections  of  the  cadastre 
are  grave  enough  from  a  theoretical  point  of  view,  but  they 
also  entail  much  hardship  and  injustice.  Some  persons 
and  some  districts  are  unduly  favoured,  leaving  to  others 
to  make  up  the  amount  that  they  have  escaped  paying. 
For  example  in  France  (where  the  land  tax  is  apportioned) 
some  proprietors  are  taxed  four  times  as  heavily  as  others. 
The  differences  in  Italian  taxation  were  still  greater,  owing 
to  the  use  of  different  cadastral  bases  for  different  dis- 
tricts 2.  Between  the  difficulties  that  adherence  to  an  old 
valuation  causes  and  those  due  to  the  expense  and  con- 
fusion of  incessant  renewals  of  the  cadastre,  it  appears  that 
the  safer  course  is  to  keep  the  original  valuations  checked 
by  the  actual  letting  values  of  land.  Apart  from  the  ex- 
pense of  continual  revaluation,  it  is  also  true  that  the  '  net 
annual  value '  or  the  '  net  income '  of  official  estimations  is 
in  a  sense  hypothetical,  as  it  depends  on  the  accuracy  of 
the  assumptions  made  for  the  purpose.  There  is,  however, 
the  qualifying  fact  that  a  well-executed  cadastre  is  of  use 
for  other  purposes.  A  careful  survey  is  essential  for 
facilitating  the  transfer  of  land,  so  that  it  is  merely  the 
economic  part  that  could  in  any  case  be  dispensed  with. 
There  seems  to  be  no  great  obstacle  to  a  gradual  revision 
of  the  general  valuation  supplemented  by  local  valuations 
strictly  on  the  letting  value.  In  this  way  the  former  would 

begun  in  1807,  was  not  completed  till  1850.  In  Madras  we  hear  that  '  in  1855 
the  work  of  survey  and  re-settlement  was  begun.  This  work  will  be  accom- 
plished in  or  about  1895,  but  certain  districts  of  the  Presidency  will  then  have 
seen  this  very  re-settlement  expire,'  Goodrich,  Economic  Journal,  i.  451. 

1  Three  valuations  of  Lancashire  made  in  1790,  1840,  and  1890  respectively 
would  have  few  common  or  even  proportional  results. 

2  Leroy  Beaulieu,  i.  343.     For  Italy,  Alessio,  i.  224-5;  Fournier  de  Flaix, 
Traite  498.     According  to  the  former  land  was  taxed  in  Lombardy  at  25  per 
cent.,  in  Liguria  at  7  per  cent. ;  the  latter  gives  79  per  cent,  for  Modena  and  17 
per  cent,  for  Sicily. 


CHAP.  I.]  TAXES   ON    LAND.  385 

be  a  slowly  changing  norm,  while  the  latter  would  recognise 
the  actual  movements  of  land  value. 

§  4.  But  whatever  may  be  the  hindrances  in  the  way  of 
a  perfectly  adjusted  land  tax,  there  is  no  doubt  that  most 
financial  systems  use  it  as  a  substantial  resource.  The 
English  land  tax,  so-called,  has  really  been  converted  into 
a  rent  charge  l  ;  but  Schedule  A  of  the  income  tax  com- 
prises land  and  houses,  the  former  in  1888-9  being 
£58,755,134  in  value,  yielding  at  the  rate  of  6d.  less  than 
£1,500,000.  To  this  sum  has  to  be  added  the  portion  of 
local  rates  that  fall  on  land.  Using  the  proportion  of  land 
to  houses  under  Schedule  A  as  a  guide  to  the  division  of 
rates  between  the  two  classes  we  would  get  slightly  under 
30  per  cent,  for  the  share  of  land.  As  the  rates  may  be 
taken  at  something  under  £28,000,000  this  method  would 
give  £8,500,000  as  the  local  charge  on  land  for  England 
and  Wales 2.  Scotland  and  Ireland  show  a  larger  propor- 
tion ;  50  per  cent,  would  in  their  case  be  the  share  of  land, 
and  allowing  for  the  other  elements  mixed  up  with  rates 
in  the  accounts  for  those  countries,  we  may  say  that  of  the 
total  £6,500,000  under  £3,000,000  would  fall  on  land. 
The  extent  to  which  the  taxation  of  houses  falls  on  ground 
rent  is  an  insoluble  problem,  at  least  for  statistical  purposes, 
but  omitting  it  for  the  present,  we  get  a  total  taxation  of 
£13,000,000  on  land  for  the  United  Kingdom.  How  far 
this  represents  a  charge  on  pure  land  value,  as  distinct  from 
that  on  investments  of  capital  is  questionable.  We  need 
not  in  any  case  hesitate  to  ascribe  the  greater  part  to  the 


1  Bk.  ii. 
2  Schedu 

1887-8 
1888-9 

ch.  4.  §  5. 
le  A— 
Land. 
61,253,522 
58,755.!34 

Houses. 
I34,739>67o 
136,922,904 

Land. 
31  per  cent. 
29^  per  cent. 

Houses. 
69  per  cent. 
70^  per  cent. 

Local  Rates  for  1887-8— 

England  and  Wales  27,804,298 
Scotland  ....  3,050,385 
Ireland  .  .  .  .  -  3,468,149. 

In  the  two  latter  countries  the  returns  from  gas  and  waterworks  are  included 
in  the  rates. 

C    C 


386  PUBLIC    FINANCE.  [BOOK  IV. 

value  of  the  land,  not  to  the  improvements.  When  we  add 
to  the  above  the  tithes  and  tithe  rent  charges,  so  far  as 
they  are  devoted  to  ecclesiastical  or  other  public  purposes, 
the  total  reaches  £  15,000,000.  Allowing  for  considerable 
under  valuation  in  the  figures  of  Schedule  A,  it  is  never- 
theless beyond  doubt  that  land  contributes  very  largely  to 
the  public  requirements. 

At  the  same  time  we  must  remember  that  a  great  deal  of 
this  burden  is  of  long  standing  ;  the  income  tax  has  been  for 
almost  fifty  years  in  continuous  operation,  and  in  the  early 
part  of  the  century  the  poor  rate  was  excessive.  There 
is  no  evidence  of  new  and  oppressive  charges  being  im- 
posed. The  growth  of  local  taxation,  as  Mr.  Goschen 
has  shown 1,  has  chiefly  affected  the  towns,  while  until 
recently  the  rent  of  land  was  rising. 

§  5.  On  passing  to  France  we  meet  with  a  very  different 
system  of  land  taxation.  The  old  Taille,  whose  defects 
were  universally  recognised,  was  supplemented  in  1710 
by  the  Dixieme,  and  from  1748  a  Vingtttme  was  levied. 
These  'tenths'  and  'twentieths'  were  rather  income  than  pure 
land  taxes,  but  were  abolished  at  the  Revolution  along  with 
the  Tattle^  and  the  modern  system  was  inaugurated. 

The  decree  of  December,  1790,  established  the  Impot 
fonder  which  was  to  be  apportioned  on  all  landed  property 
in  proportion  to  its  net  revenue.  This  phrase  is  evidently 
due  to  physiocratic  influence,  and  was  explained  to  mean 
what  remained  over  after  all  expenses  were  deducted 
from  the  gross  produce.  The  tax  was  to  be  a  fixed  sum 
apportioned  among  the  contributories,  and  to  be  payable 
in  money.  It  was  not  to  exceed  one-sixth  of  the  net 
revenue,  and  on  the  loose  estimate  that  240,000,000  francs 
would  be  one-sixth,  the  contribution  was  fixed  at  that 
amount  with  an  additional  6o,ooo,oco  francs  for  local 
taxation.  The  disturbances  of  the  Revolutionary  period 
hindered  the  collection  of  this  impost,  and  the  unequal 
pressure  owing  to  the  absence  of  proper  valuations  was 

1  Local  Taxation,  17,  50. 


CHAP.  I.] 


TAXES   ON    LAND. 


the  ground  of  successive  reductions,  by  which  the  total 
amount,  from  being  240,000,000  francs  iri  1790-6,  fell  to 
150,000,000  in  1821.  In  1835  the  increased  value  of  house 
property,  which  is  included  by  the  law  of  1790,  was  taken 
into  account.  The  additional  centimes,  really  an  increase 
of  the  tax,  were  given  up  in  1850,  and  by  1880  the  total 
amount  was  almost  174,000,000  francs  (,£7,000,000).  The 
extra  centimes  for  the  departments  and  communes  were 
very  nearly  trebled  in  amount  since  1820;  in  1880  they 
were  94,000,000  francs  and  82,000.000  francs  respectively1 
The  loud  complaints  of  the  agriculturists  as  to  the  in- 
equalities and  unjust  pressure  of  the  Impot  fonder  have 
been  the  cause  of  the  late  reform  by  which  the  house  tax 
is  distinctly  separated  from  the  land  tax,  and  the  latter, 
which  was  118,000,000  francs,  reduced  to  102,000,000  francs. 
The  result  has  been  that  by  the  budget  estimate  of  1 890,  even 
with  an  extra  charge  of  8  per  cent,  on  the  original  general 
tax,  the  total  taxation  on  land  stands  at  255,000,000  francs 
or  less  than  £10,400,000.  The  increase  of  house  property 
and  buildings  has  supplied  a  new  object  for  the  heavier 
taxation  as  in  the  case  of  England.  The  land  tax  remains 
one  of  apportionment,  while  the  house  tax,  or  more  strictly 
that  on  land  with  buildings  (Propritte  bdlie\  has  become 
rated,  and  is  fixed  for  the  present  at  3*20  per  cent.  The 
next  step  in  reform  will  probably  be  the  abandonment  of 
the  apportioning  of  the  land  tax  in  favour  of  the  more 
suitable  rated  system  2. 


1  More  precise  figures  are  — 

1820 

1840 

1860 

1880 

Francs. 

Francs. 

Francs. 

Francs. 

Principal  Amount    . 

168,225,220 

155,669,805 

163,837,194 

173,827,511 

Additional  centimes 

42,899,677 

33,936,017 

for    general    pur- 

poses. 

Ditto     for     depart- 

36,568,634 

47,629,611 

70,238,036 

94,077,070 

ments. 

Ditto  for  communes 

28,518.003 

24,820,985 

45.683,257 

81,904,095 

Ditto  for  relief,  &c. 

3,768,747 

3,601,486 

4,476,168 

5.350,874 

Total 

279,980,281 

265,657,907 

284,234,655 

355i  '59*550 

2  For  the  French  Land  Tax,  Stourm,  i.  124-220;  Vignes,  i.  25-39. 
dcs  Finances  s.  v.  '  Fonciere? 

C  C  2 


Diet. 


PUBLIC    FINANCE.  [BOOK  IV. 

§  6.  The  Italian  land  tax  is  a  development  from  the 
taxes  of  the  several  Italian  States.  As  the  simplest  course, 
110,000,000  lire  was  the  amount  fixed  for  apportion- 
ment among  the  different  divisions.  Measures  of  reform 
have  been  since  attempted.  The  tax  on  buildings  was 
separated  in  1 865  and  made  a  rated  tax,  and  redistributions 
of  the  total  charge  among  the  provinces  were  carried  out. 
The  defective  scheme  of  the  old  cadastres  has  led  to  the 
enactment  of  a  law  prescribing  the  preparation  of  a  new 
and  uniform  one  for  all  Italy.  The  variations  in  amount 
of  the  land  tax  have  been  from  125,000,000  lire  to  about 
96,000,000  lire,  i.e.,  speaking  generally,from  about  £4, 000,000 
to  £5,000,000,  but  the  local  taxation  has  to  be  added. 
Thus  for  the  year  1886-7  the  provincial  tax  was  53,000,000 
lire,  and  the  communal  one  76,000,000  lire  which,  with 
110,000.000  lire,  the  general  land  tax  for  that  year,  made 
a  total  of  240,000,000  lire  (£9,200,000)  ;  a  much  higher 
charge  than  that  of  France.  In  qualification  it  must,  how- 
ever, be  noticed  that  the  whole  taxation  of  Italy  is  far 
heavier.  The  most  serious  grievance  is  found  in  the  in- 
stances of  heavily  taxed  communes  where  the  greater  part 
of  the  value  of  land  is  absorbed  in  taxation.  So  far  has  this 
been  carried  that  there  have  been  many  cases  of  evictions 
by  the  State  l.  Inequality  in  distribution  and  excessive 
weight  in  amount  are  the  gravest  possible  defects  in  any  tax. 
The  new  valuation,  though  costly,  will  remedy  the  former, 
but  the  latter  is  a  question  of  policy  as  well  as  Finance. 

The  Spanish  land  tax,  which  in  its  present  form  dates 
from  j  845,  includes  stock,  and  is  therefore  more  primitive. 
Owing  to  the  want  of  a  correct  valuation  the  charges  are 
imperfectly  distributed.  The  proportion  fixed  for  1890-1  is 
1 5 J  per  cent,  on  those  places  that  have  given  a  satisfactory 

1  '  En  1876,  6,614  proprietes  etaient  expropriees  par  le  fisc  pour  le  recouvre- 
ment  de  936,774  francs  cTimpdt  et  en  1877,  6,644  proprietes potir  662,  722  francs. 
Le  fisc  devore  la  petite  propriete  trop  obere.  De  1873  a  1878,  35,074 /^/z'/j 
proprietaires  ont  perdu  leur  avoir  par  I"1  expropriation  forcee?  Laveleye,  Lettres 
tCltalie  (1880),  160-1.  For  the  Italian  land  tax,  De  Parieu,  i.  205-218  ; 
Alessio,  Sistema  Tributario,  i.  88-232. 


CHAP.  I.]  TAXES   ON    LAND.  389 

declaration  of  value,  for  others  17!  per  cent.  The  estimate 
for  1890-1  is  nearly  115,000,000  pesetas  (£4,600,000)  with 
over  17,000,000  pesetas  (£680,000)  for  local  purposes. 

The  Portuguese  land  tax  is  closely  on  the  lines  of  the 
French  hnpbt  fonder.  It  was  originally  rated,  but  since 
1852  has  been  apportioned;  it  is,  however,  proposed  to 
return  to  the  rated  method.  The  yield  is  nearly  3,000,000 
milreis  (about  £650,000)  after  paying  assessment  expenses. 

Belgium  has  a  rated  tax  based  on  an  elaborate  valuation. 
Up  to  1867  the  method  of  apportionment  was  employed. 
For  national  purposes  the  annual  amount  is  about  £500,000 
with  additional  centimes  for  local  government  of  over  one-' 
half  that  sum  (£300,000 l). 

Greece,  which  possessed  the  tithe  system  till  1880,  has 
now  a  rather  primitive  but  yet  complicated  group  of '  land 
taxes '  on  labouring  animals,  on  area  and  certain  pro- 
ducts, yielding  altogether  about  £500,000. 

§  7.  The  land  taxes  are  as  yet  confined  to  the  several 
States  of  the  German  Empire,  the  imperial  revenue  being 
derived  mainly  from  indirect  taxation.  With  numerous 
differences  in  detail  there  is  the  general  system  of  basing 
the  tax  on  official  valuation.  The  Prussian  land  tax,  in- 
herited from  the  i8th  century,  was  reformed  in  the  period 
1810-20;  a  new  valuation  was  arranged,  and  inequalities  in 
the  distribution  between  the  different  provinces  modified  ; 
but  the  survivals  of  the  older  system  of  privilege  prevented 
complete  success  in  this  object.  In  1821  its  yield  was 
under  £1,500,000.  These  inequalities  were  dealt  with  by 
the  legislation  of  1861.  The  house  tax  was  separated,  and 
for  the  land  tax  the  amount  was  fixed  at  10,000,000  thalers 
(£1,500,000)  from  1865,  and  a  fresh  valuation  carried  out. 
The  new  Prussian  provinces,  acquired  in  1866,  added 
3,200,000  thalers  (£480,000)  to  this  fixed  sum,  giving  a 

1  More  accurate  figures  for  1891  are — 

For  the  State,  13,103,000  francs. 
For  Provinces,  1,926,000  francs. 
For  Communes,  5,621,000  francs. 


3QO  PUBLIC   FINANCE.  [BOOK  IV. 

total  of  ;£2,coo,ooo.  The  additional  local  charges  are  not 
easily  arrived  at,  but  for  the  year  1880-1  the  communal  and 
provincial  extra  land  taxes  were  equal  to  those  of  the  State 
in  amount  (^"2.000,000),  giving  a  total  burden  on  land  of 
.£4,000,000,  independent  of  the  action  of  the  income  tax. 

Each  of  the  smaller  German  States  employs  some  form 
of  land  tax.  Bavaria  shows  a  less  developed  form  in  its 
reference  to  gross  produce  as  the  basis  of  calculation. 
The  cadastral  surveys  are  in  most  cases  elaborate,  and 
serve  other  than  fiscal  purposes,  such  as  facilitating  the 
transfer  of  land.  The  communes  of  the  several  States  also 
•receive  contributions  through  additions  to  the  land  tax1. 

Austria  has  developed  a  land  tax  on  a  similar  type. 
By  the  reform  of  1817  the  valuation  of  the  i8th  century 
was  to  be  replaced  by  a  new  one  completed  in  1856.  The 
house  tax  was  separated  in  1820.  In  1879  a  law  for  revision 
was  passed,  and  in  1881  the  annual  amount  was  fixed  at 
35,190,000  florins  for  fifteen  years,  a  new  valuation  to 
be  then  made.  The  Hungarian  land  tax  was  almost  the 
same  sum  (35,000,000  florins),  and  the  local  charges  in 
Austria  levied  on  land  were  believed  to  reach  the  like 
amount.  Thus  the  burden  on  land  in  Austria  proper  is 
under  £7,000,000. 

Taxation  of  land  in  the  United  States  is  imposed 
through  the  general  property  tax,  which,  as  we  shall  see, 
presses  with  undue  weight  on  real  property,  but  its  dis- 
cussion belongs  to  a  later  chapter  2.  Nor  need  the  Indian 
land  revenue  be  again  considered. 

§  8.  The  foregoing  notices  of  the  land  taxation  of  the 
principal  countries  bring  out  its  characteristic  features. 
Specially  worthy  of  observation  are  :  first,  the  considerable 
amount  contributed  on  the  whole,  and  to  both  general  and 
local  revenues.  The  absolute  amount  is  highest  in  Eng- 
land, but  everywhere  a  good  percentage  of  the  net  annual 
returns  is  taken  for  public  use  3.  Another  very  common 

1  For  the  German  land  taxes,  Cohn,  §§  303-6  ;  Fournier  de  Flaix,  393  sq. 

2  Bk.  iv.  ch.  4.  §  3.  3  Probably  lowest  n  Saxony. 


CHAP  I.]  TAXES   ON   LAND.  39! 

circumstance  is  the  employment  of  the  system  of  appor- 
tionment. A  total  fixed  sum  is  thus  secured,  and  as  each 
district  must  pay  its  part,  it  has  a  manifest  interest  in  making 
all  contribute  fairly ;  nevertheless,  the  method  has  the  great 
defects  of  rendering  an  important  part  of  the  tax  revenue 
inelastic,  and  it  is  likely  to  reduce  the  land  tax  to  a  rent 
charge  as  happened  in  the  case  of  England.  The  '  rated  ' 
or  percentage  system  is  free  from  these  faults,  and  is  there- 
fore the  best  suited  for  modern  Finance.  A  third  question 
intimately  connected  with  the  land  tax  is  that  of  valuation. 
If  the  '  rated '  system  be  used,  it  is  necessary  in  the  in- 
terests of  justice  that  the  basis  on  which  the  estimate  of 
value  is  made  should  be  uniform.  Thus  e.  g.  the  English 
valuation  of  land  is  believed  to  be  closer  to  the  true  value 
than  the  Irish  one,  from  which  it  follows  that  the  income 
tax  in  its  A  schedule  is  not  the  same  in  the  two  countries. 
The  Italian  land  tax  is  a  more  extreme  instance  of  the 
same  evil.  In  all  countries  this  inequality  must  in  some 
degree  exist  between  individuals  and  smaller  districts,  but 
this  fact  only  strengthens  the  claim  for  all  practicable 
efforts  to  secure  the  removal  of  proven  injustices.  Even 
if  it  be  impossible  to  alter  quickly  the  particular  forms 
of  the  tax,  there  is  an  advantage  in  knowing  the  amount 
of  inequality,  which  can  then  be  compensated  by  the 
adjustment  of  other  taxes. 

Finally,  the  land  tax  is  what  has  been  called  a  *  real '  \ 
tax  ;  it  deals  with  the  object,  land,  and  takes  no  note  of 
the  position  of  the  proprietor.  When  properly  developed 
it  is  proportioned  to  '  net  produce,'  and  therefore  allows 
for  the  expenses  of  working  the  soil.  For  the  same  reason 
it  should  not  take  indebtedness  into  account.  Charges  on 
land  are  a  part  of  the  net  return  and  have  no  claim  to 
deduction.  A  variable  land  tax  may  therefore  press  with 
great  severity  on  encumbered  proprietors  who  have  to  pay 
the  tax  on  the  interest  of  their  debts.  Any  attempt  to 
remedy  this  evil  has  the  necessary  result  of  creating  a 
partial  tax  on  interest  of  capital,  and  if  unaccompanied  by 


392  PUBLIC    FINANCE.  [BOOK  IV. 

taxation  of  other  forms  of  capital,  would  either  discourage 
loans  to  owners  of  land  or  raise  the  interest  on  mortgages. 
The  conclusion  suggested  by  these  facts  is  that  the  land 
tax  had  best  be  absorbed  in  a  general  income  tax, 
when  part  of  the  burden  would,  as  under  existing  English 
arrangements,  be  paid  by  the  creditors.  If,  on  the  other 
hand,  the  distinct  land  tax  be  retained,  two  courses  are 
open ;  either  to  retain  it  at  a  fixed  amount  when  it  becomes 
a  rent  charge,  an  undesirable  proceeding,  or  to  give  it  up 
to  local  bodies.  We  have  seen  that  taxes  on  real  property 
are  a  good  form  of  local  revenue 1,  and  both  in  France  and 
the  United  States  this  treatment  which  is  in  accordance 
with  British  practice  has  been  proposed.  The  actual  con- 
dition in  Germany  with  its  numerous  smaller  States  partly 
realizes  this  object 2. 

§  9.  The  incidence  of  the  land  tax  is  a  final  question  for 
consideration.  In  its  ruder  forms  the  pressure  fell  chiefly 
on  the  actual  cultivators,  though  the  ultimate  effect  of 
heavy  taxation  must  have  been  felt  by  the  proprietors  in 
the  check  to  agricultural  improvement  and  the  diminution 
in  their  dues.  Under  the  competitive  system,  a  propor- 
tional tax  on  produce  tends  to  raise  prices  and  therefore 
comes  on  the  consumer,  but  the  inevitable  reaction  on  rent 
is  found  here  also.  As  soon  as  net  return  is  taken  as  the 
standard  for  taxation,  rent  is  the  element  affected.  A 
land  tax,  therefore,  in  its  developed  form,  may  not  in- 
accurately be  regarded  as  a  tax  on  rent,  and  the  general 
principles  of  incidence  applied  to  it.  In  actual  working, 
however,  various  complications  arise.  The  action  of  com- 
petition is  not  always  found  in  full  force,  and  so  far  as  any 
portion  of  the  pure  economic  rent  is  held  by  the  immediate 
payer — tenant  or  other — he  has  to  submit  to  the  burden  :\ 

1  Bk.  iii.  ch.  6.  §  4. 

2  The  proposal  has  been  made  by  M.  Leon  Say  in  the  recent  debates  on  the 
Impot  Fonder,  and  by  Professor  Ely,  Taxation,  251-3,  who  would  exempt  land 
from  even  state  taxation. 

3  'As  a  matter  of  fact  it  appears  that  a  great  portion  of  the  farms  in  England 
are  not  rack-rented.     If  so,  it  is  clear  that  any  increase  in  local  burdens  must 


CHAP  I.]  TAXES   ON   LAND.  393 

A  land  tax  may  also  affect  the  interests  of  labour.  If  in- 
vestment of  capital  in  agriculture  is  checked,  and  if  the 
rate  of  wages  is  easily  affected  by  the  action  of  employers 
(as  has  been  often  the  case)  taxation  on  the  cultivator  may 
be  shifted,  not  to  the  landlord  by  lowering  rent,  but  to  the 
labourer  by  lowering  wages,  or  in  a  time  of  rising  prices  by 
preventing  their  proportional  increase  in  money  1.  Again, 
the  fact  that  the  land  which  is  the  object  of  taxation  often 
owes  its  value  to  the  capital  sunk  in  it,  makes  the  burden 
fall  on  the  yield  of  fixed  capital,  but  we  need  not  again 
consider  this  point 2. 

A  more  difficult  and  disputable  point  arises  in  connexion 
with  the  incidence  of  a  long  continued  land  tax.  Here  it 
is  said  that  the  tax  is  really  a  deduction  from  property. 
As  land  is  sought  for  its  revenue,  what  lowers  its  revenue 
lowers  its  selling  price,  and  therefore  a  land  tax  falls 
altogether  on  the  possessor  at  the  time  of  its  imposition. 
Subsequent  acquirers  take  the  land  subject  to  the  burden 
and  pay  a  lower  price  in  consequence.  This  process  of 
'  amortization,'  as  it  has  been  called,  makes  the  subsequent 
removal  of  the  tax  undesirable  :  the  persons  who  have  lost 
by  its  establishment  are  not  the  same  as  those  who  gain  by 
its  remission.  A  purchaser  has  got  land  cheaper  and  gains 
a  further  advantage  by  escaping  the  tax  ;  in  fact  he  is 
allowed  for  it  twice  over,  once  at  the  time  of  purchase  and 
again  at  that  of  remission. 

The  element  of  truth  in  this  theory,  which  has  received 
much  favour,  appears  to  be  the  following  :  (i)  as  previously 
pointed  out  3,  when  a  land  tax  becomes  definitely  fixed,  so 
that  it  can  be  foreseen,  or  even  capitalized  and  redeemed, 
there  is  no  inaccuracy  in  speaking  of  it  as  a  charge  on  land 

fall  on  the  margin  between  the  actual  rent  and  the  rack-rent,  and  so  far  diminish 
the  advantage  derived  by  the  farmer  from  his  actual  rent  being  below  a  rack- 
rent,  and  tilt  that  margin  were  exhausted  it  would  naturally  be  useless  for 
him  to  apply  to  his  landlord  to  readjust  his  rent,'  Goschen,  Local  Taxation, 
165. 

1  See  Leslie,  Essays,  395-7,  for  an  illustration. 

2  See  Bk.  iii'.  ch.  5.  §  6.  3  Bk.  ii.  ch.  4.  §  5. 


394  PUBLIC    FINANCE.  [BOOK  IV. 

i  pvhich  lowers  its  selling  price  ;  it  is  just  the  same  as  a  mort- 
gage, and  is  taken  into  account  by  purchasers.  (2)  A  stable 
tax  of  any  kind  has  some  of  the  advantages  to  which 
Canard  gives  such  exaggerated  importance.  Its  pressure 
is  more  regular,  and  therefore  less  felt.  An  invariable  land 
tax,  undoubtedly,  has  this  in  its  favour.  On  the  other  hand, 
there  is  no  reason  for  regarding  the  modern  land  taxes  as 
perfectly  stable  and  fixed.  In  transactions  with  respect  to 
land  there  are  not  merely  the  existing,  but  the  prospective 
burdens  to  be  taken  into  account.  To  assume,  e.g.  that 
the  French  'centimes  additionnels*  or  the  English  local 
rates  have  been  '  amortized '  would  be  an  obvious  error. 
We  cannot  foresee  the  future  movement  of  taxation  in 
respect  to  land,  and  we  cannot  expect  that  the  present 
systems  will  always  continue.  Another  important  con- 
sideration is  the  relation  of  land  taxation  to  the  other 
forms.  If  it  should  happen  to  be  unduly  heavy  there 
would  be  a  tendency  to  depress  the  value  of  the  land  so 
taxed ;  just  as  if  it  were  too  light  its  effect  would  be  the 
opposite,  but  this  is  characteristic  of  all  taxation.  Tea, 
sugar,  or  any  other  commodity  will  have  its  value  for  the 
time  being  affected  by  the  creation  or  remission  of  a 
special  tax  on  it.  But  where,  as  we  may  expect,  there 
is  a  due  proportion  of  taxation  to  the  several  forms  of 
income,  the  investor  in  land  will  only  receive  the  same 
proportional  return  as  he  would  obtain  in  other  directions. 

/  An  alteration  in  the  land  tax  ought  to  have  as  its  motive 
the  effort  to  secure  a  more  equal  distribution  of  burdens, 
and  to  this  there  can  be  no  valid  objection.  At  the  same 
time,  where  a  tax  has  been  recognised  as  at  once  special 
and  definitely  fixed,  it  seems  to  pass  out  of  the  ordinary 
category  of  taxes  and  into  that  of  charges,  a  transforma- 
tion only  possible  in  the  case  of  durable  productive  wealth, 
and  most  prominent  in  respect  to  land. 


CHAPTER    II. 

TAXES  ON  CAPITAL  AND  BUSINESS. 

§  1.  FOR  fiscal  purposes  durable  capital  has  the  closest 
resemblance  to  land — the  two  are  indeed  sometimes  inex- 
tricably mixed  up  together — and  of  its  different  forms, 
houses  and  buildings  generally  are  the  most  important 
from  the  same  point  of  view.  Sometimes  as  an  integral 
part  of  the  land  tax,  but  more  often  with  a  distinct  posi- 
tion, we  find  the  charge  on  houses  used  both  for  local  and 
general  purposes.  The  reasons  for  its  employment  are  to 
be  found,  partly  in  its  connexion  with  land,  partly  in  the 
universality  of  the  use  of  houses,  which  extends  taxation  to 
all  classes,  partly  in  the  convenience  and  readiness  of 
assessment,  and  finally  in  the  belief  that  the  value  of  a 
person's  house  was  a  satisfactory  test  of  his  income.  These 
considerations  have  very  different  weight  at  different 
periods.  In  early  times  the  one  object  was  to  secure 
receipts,  and  for  this  purpose  houses,  or  something  con- 
nected with  them,  were  convenient  objects  of  imposition. 

As  in  the  case  of  land,  the  precise  form  adopted  varied  ; 
at  first  houses  were  taxed  simply  as  part  of  the  land  on 
which  they  stood,  being  treated  as  a  particular  kind  of 
improvement.  The  hearth  or  chimney  tax  was  in  use  in 
the  feudal  period,  under  the  name  foaticum.  The  sub- 
stitution of  windows  for  chimneys  made  another  variety, 
to  be  succeeded  by  taxation  according  to  the  class  of 
house,  or  proportioned  to  the  letting  value.  The  problems 


396  PUBLIC   FINANCE.  [BOOK  IV. 

and  course  of  development  of  the  land  tax  reappear  with 
modifications  in  the  case  of  the  house  tax. 

§  2.  England  shows  this  development.  The  hearth  tax, 
established  in  1662,  was  so  unpopular  that  it  was  abolished 
in  1688,  but  soon  replaced  by  the  window  tax,  under  which 
a  scale  of  payment  was  fixed — ten  windows  and  under,  u., 
increasing  at  a  higher  rate  for  a  larger  number.  With 
several  changes  in  the  rates,  and  with  additional  stringent 
provisions  to  check  evasion,  the  tax  continued  all  through 
the  i8th  century.  In  1815  its  yield  was  about  £2,000,000. 
Sounder  ideas  of  taxation  led  to  its  repeal  in  1851.  Adam 
Smith's  suggestion  that  inhabited  houses  should  be  taxed 
on  their  annual  value  was  adopted  in  1778,  in  addition  to 
the  existing  window  tax.  Houses  under  £5  value  were  to 
be  free  ;  those  between  £5  and  £50  to  pay  6d.  in  the  pound 
(2^  per  cent.) ;  those  over  £50,  is.  (5  per  cent.).  Several 
increases  of  the  tax  were  made  for  war  purposes,  till  in  1 808 
the  rate  on  houses  of  £40  and  over  was  2s.  iod.,  or  nearly 
15  per  cent.  By  a  curious  selection  the  house  duty  was  re- 
pealed in  1834  instead  of  the  window  tax,  but  on  the  repeal 
of  the  latter  in  1851  it  was  reimposed.  Houses  under  £20 
were  exempted,  and  business  premises  paid  only  two-thirds 
of  the  rate  on  ordinary  houses,  i.  e.  6d.  and  qd.  per  pound 
respectively.  The  last  change  has  been  made  in  1890 
when  Mr.  Goschen  restored  the  old  system  of  grading. 
Houses  between  £20  and  £40  pay  only  4</.,  and  those 
between  £40  and  £60,  6d.,  the  corresponding  rate  on 
business  premises  being  id.  and  ^d.  The  yield  of  the 
tax  was  by  these  changes  reduced  from  £2,000,000  to 
£1,450,000 l. 

To  arrive  at  the  total  pressure  of  taxation  on  buildings 
we  must  add,  (i)  the  income  tax  in  schedule  A,  amounting 
at  6d.  to  about  £3,500,000,  and  (2)  the  great  mass  of  local 
rates.  Taking  the  figures  in  the  last  chapter,  if  the  bal- 
ance of  rates  can  be  assigned  to  buildings,  we  would  get 

1  On  the  English  house  and  window  taxes,  Wealth  of  Nations,  355-357; 
Dowell,  iii.  165-192. 


CHAP  II.]  TAXES   ON   CAPITAL   AND   BUSINESS.  397 

the  enormous  sum  of  £23,000,000  as  their  local  taxation  1. 
The  occupier,  the  ground  landlord,  and  in  the  case  of 
business  establishments,  the  consumers  of  the  commodities, 
are  all  participants  in  the  burden,  but  we  must  again  note 
that  a  great  deal  of  this  expenditure  is  economically  repro- 
ductive, so  that  the  taxes  are  paid  out  of  a  fund  created  by 
their  employment. 

§  3.  France  has  not  reached  the  same  stage  of  develop- 
ment as  England  in  regard  to  this  form  of  taxation.  The 
separation  of  the  land  and  house  taxes  has  only  just  been 
accomplished,  and  the  door  and  window  tax  still  exists, 
in  addition  to  the  Mobilier,  or  tax  on  letting  value.  The 
latter,  suggested  under  the  monarchy  as  a  substitute  for 
the  personal  Taille^  was  in  its  origin,  as  established  by 
the  Constituent  Assembly  in  1791,  a  tax  on  income  based 
on  the  presumption  that  house  rent  was  a  measure  of  its 
amount,  but  owing  to  the  belief  that  income  increased 
more  rapidly  than  the  cost  of  housing,  the  tax  was  on 
a  progressive  scale  so  calculated  as  to  be  proportional 
to  income,  and  some  qualifications  were  made  by  using 
other  elements.  In  1798  these  refinements  were  abolished, 
and  the  Mobilier  became  a  house  tax.  The  tax  (which 
is  combined  with  the  personal  tax,  to  be  discussed  in  the 
next  chapter)  is  apportioned,  and  amounts  to  about 
£3,000,000,  of  which  at  least  three-fourths  comes  from 
the  house  tax  part 2.  The  contributions  to  local  taxation 
through  the  additional  centimes  are  of  very  nearly  the 
same  amount. 

The   door  and  window  tax  was  established  under  the 

1  Bk.  iv.  ch.  i.  §  4. 

3  The  yield  of  the  Personnelle  mobilttre  has  been  as  follows — 
FRANCS  (ooo's  omitted). . 

Additional 


1830 
1870 
1880 
1885 
1890 
1891 


Principal. 

27,161 

46,004 
52,161 
57,846 

75,055 
81,640 


Centimes. 
14,100 

44.337 
64,382 
74,240 


398  PUBLIC    FINANCE.  [BOOK  IV. 

Directory  in  1798.  At  first  a  rated  tax,  it  was  appor- 
tioned in  1802,  and  with  the  exception  of  1831-2,  it  has  so 
continued,  with  a  steady  increase  in  amount.  From  a  little 
over  £500,000  in  1830  it  rose  to  nearly  £  1,600,000  in  1885, 
while  the  additional  centimes  that  were  only  £100,000  at  the 
former  date,  had  come  to  equal  the  principal  at  the  latter. 
The  total  may  therefore  be  regarded  as  about  £3,000,000, 
obtained  by  an  inconvenient  and  vexatious  method  l.  To 
the  foregoing  the  building  tax,  now  separated  from  the 
pure  land  tax,  adds  a  sum  of  £2,500,000  for  the  principal, 
with  additions  coming  very  close  to  £3000,000  (£2,600,000 
of  that  amount  being  for  the  communes  and  departments  in 
about  equal  proportion).  As  the  tax  is  now  a  rated  one 
the  increase  in  value  of  house  property,  even  if  the  present 
rate  of  3-20  per  cent,  is  maintained,  will  add  to  the  yield. 
The  total  burden  on  houses  is  therefore,  speaking  broadly, 
between  £13,000,000  and  £i  4,000,000 2. 

Italy  had,  as  we  saw,  established  a  distinct  house  tax  in 
1865.  The  amount  obtained  by  it  in  1866  was  £1,300,000; 
by  1886  it  had  more  than  doubled,  being  nearly  £2,650,000 
Moreover  the  local  charges,  superimposed  on  the  principal, 


The  figures  for  the  '  door  and  window '  tax  are — 
FRANCS  (ooo's  omitted). 


1830 
1870 
1880 

1885 


Principal. 
12,812 

33,9" 
36,588 

39>7°3 


Additional. 

2,711 
23,750 
33,594 
38,320 


2  The  estimate  for  1890  for  Proprietes  baties  was— 
FRANCS  (ooo's  omitted). 

Principal 63,450 

Additional  for  education        .         .         .  5,076 

For  departments 32»723 

For  communes 32,698 

Extras 3-557 

Total     137,504 

Taking  this  with  the  preceding  notes  we  reach  the  result  in  the  text.  Consul 
Egerton  states  that  '  the  total  tax  on  land  and  houses  in  France  will  be  found 
to  amount  this  year  (1890)  to  about  £15,000,000  independently  of  the  personal 
and  '  mobiltire '  tax  of  ^5,500,000  and  of  the  door  and  window  tax  of  over 
£3,000,000,'  Reports  as  to  the  Taxation  of  Land  and  Buildings  (C.  6209),  16. 


CHAP.  II.]  TAXES   ON   CAPITAL   AND   BUSINESS.  399 

came  to  almost  the  same  amount.  For  the  year  1888-9  the 
total  for  state  and  local  taxation  was  close  on  £5,500.000, 
equally  divided  between  the  two  branches.  Though  the 
absolute  amount  is  much  less,  the  pressure  is  probably 
greater  than  in  England  or  France 1. 

Belgium,  Spain  and  Portugal  do  not  separate  their  land 
and  house  taxes  ;  it  is  therefore  impossible  to  deal  with  them 
under  this  head. 

The  Prussian  house  tax,  made  distinct  in  1861,  and  sepa- 
rately collected  since  1865,  is  proportioned  to  value — 2  per 
cent,  (or  4  per  cent,  in  the  case  of  houses  let  to  tenants).  It 
has  grown  with  the  increase  of  wealth  from  £850,000  in  1878 
to  over  £1,500.000  in  T  889-90.  The  local  charges  may  be  less 
than  half  that  amount,  giving  a  total  of  about  £2,200,000 a. 

In  most  of  the  smaller  German  States  the  house  tax  is  a 
part  of  the  land  tax.  Bavaria,  as  in  the  case  of  land, 
applies  the  '  area  '  and  '  productive  power '  principle  to  the 
taxation  of  houses. 

The  Austrian  house  tax,  in  existence  since  1820,  yielded 
for  1889  about  £3,000,000,  and  that  for  Hungary,  about 
£1,000,000,  not  including  the  local  charges  3. 

§  4.  From  the  facts  (unfortunately  imperfect)  just  given, 
we  can  see  that  the  course  of  development  in  respect  to 
the  taxation  of  buildings  is  towards  taking  their  value,  or, 
if  possible,  their  annual^yield,  as  the~~Easis^of~assessment, 
and  at  the  same  time  towards  separating  them  from  land. 
The  French  door  and  window  tax  may,  therefore,  be  at 
once  condemned  as  a  pernicious  survival  of  an  antiquated 
method  :  its  abolition,  or  rather  absorption  in  the  mobilier, 
is  merely  a  question  of  time. 

The  problem  of  assessment  has  usually  been  dealt  with  in 
the  way  approved  by  Adam  Smith,  but  with  a  large  allow- 
ance for  expenses  and  repairs,  varying  in  the  different  coun- 

1  For  the  Italian  house  tax,  Alessio,  i.  233-266. 

2  Cohn,  §  306;  Reports  on  Taxation  (C.  6209),  31. 

3  I.e.  taking  the  florins  at  2s.,  the  figures  are — Austria,  31,058,000  florins  ; 
Hungary,  10,000,000  florins. 


4<X>  PUBLIC   FINANCE.  [BOOK  IV. 

tries.  On  the  whole,  it  is  easier  to  ascertain  the  letting  value 
of  houses  than  of  land,  and  there  is  besides  the  element  of 
cost  of  construction  to  be  used  as  a  corrective.  Some 
difficulties,  however,  certainly  exist.  It  is  not  easy  to  deal 
with  deterioration  and  the  resulting  loss  of  value,  more 
particularly  in  respect  to  buildings  employed  in  produc- 
tion. Revaluation  at  short  intervals  is  the  only  suitable 
way,  but  it  is  both  troublesome  and  expensive.  The  oppo- 
site case,  i.  e.  where  improvements  have  been  made,  is  also 
complicated.  The  increased  value  ought  certainly  to  be 
taxed,  but  the  effect  in  checking  improvements  is  serious. 
The  usual  course  of  allowing  a  period  to  elapse  before 
rating  new  constructions  is  the  best  practical  solution. 

The  taxation  of  expensive  private  dwellings,  such  as 
noblemen's  mansions,  has  attracted  more  attention  than  its 
intrinsic  importance  warrants.  In  England  such  houses 
have  been  rated  at  a  nominal  figure  on  account  of  the  sup- 
posed expense  of  maintaining  them,  which  is  thought  to 
reduce  their  letting  value.  On  the  other  hand,  the  cost 
of  construction  has  been  proposed  as  the  basis  for  valua- 
tion, or  again,  that  of  reconstruction.  Neither  is,  however, 
adequate.  Letting  value  fails  where  the  objects  are  not 
really  and  in  fact  let  to  tenants.  Cost  would  give  much 
too  high  a  value  in  some  cases,  as  expenditure  is  not 
always  represented  by  additional  value.  The  true  test 
in  such  cases  lies  in  the  utility  of  the  house  and  surround- 
ings, which  selling  or  market  letting  value  would  measure, 
but  which,  in  its  absence,  must  be  estimated,  either  by 
reference  to  similar  dwellings  let  elsewhere x,  or  by  the 
probable  expenditure  of  the  possessor  on  his  house  accom- 
modation. The  modern  tendency  to  apply  commercial 
principles,  even  to  aristocratic  residences  and  estates,  will 
afford  a  means  of  readily  gauging  value  in  these  instances. 

§  5.  Far  more  important  is  the  very  difficult  question 
of  the  incidence  of  house  and  building  taxes.  So  many 

1  The  plan  adopted  in  the  recent  valuation  of  buildings  in  France,  Finanz 
Archiv,  viii.  193-4. 


CHAP.  II.]  TAXES   ON    CAPITAL   AND  BUSINESS.  40! 

elements  are  combined  that  the  assignment  to  each  of  its 
separate  share  is  a  task  of  some  complication.  The  value 
of  the  ground  on  which  the  buildings  stand  is  determined 
by  the  law  of  rent,  and  a  tax  that  falls  on  it  would,  there- 
fore, appear  to  be  untransferable.  A  house  itself  is  a  par- 
ticular kind  of  commodity,  and  its  share  of  taxation  may 
be  supposed  to  come  under  the  laws  that  determine  the 
incidence  of  taxes  on  commodities.  Accordingly,  Adam 
Smith,  Ricardo,  and  Mill  have  agreed  in  asserting  that  / 
taxes  on  ground  rent  fall  on  the  landlord,  while  those  on/ 
building  rent  fall  on  the  occupier.  The  builder  must,  they 
thought,  get  his  fair  profit.  The  solution  is  not  quite  so 
simple.  First,  as  to  ground  rent,  wherever  there  is  an 
alternative  use  for  land,  it  is  plain  that  a  tax  on  it,  if  em- 
ployed for  building,  is  strictly  limited  by  that  other  use : 
thus  until  the  rent  of  land  for  building  exceeds  that  of 
agricultural  land  by  the  amount  of  the  tax,  no  landlord 
will  let  it  for  that  purpose.  The  tax  on  this  minimum 
ground  rent  would  be  passed  on  to  the  builder  ;  but  when 
that  point  is  reached  the  ground  landlord  has  a  differential 
gain,  and  cannot  escape  it  by  withdrawing  his  land  as 
he  would  thereby  lose  still  more.  We  can,  therefore, 
accept  the  doctrine  of  the  non-shifting  of  a  tax  on  ground 
rent  as  generally  true.  The  other  part  of  the  doctrine 
requires  more  consideration.  The  rent  of  houses  depends 
proximately  on  the  conditions  of  supply  and  demand  ; 
taxation  levied  from  the  occupier  is  equivalent  to  so  much 
additional  rent,  what  in  the  case  of  an  ordinary  com- 
modity would  be  a  rise  of  price.  The  consequent  check 
to  demand  tends  to  take  off  part  of  this  increase,  and 
therefore  the  initial  effect  is  to  throw  some  of  the  tax  on 
the  house  owner.  As  houses  are  a  very  durable  commodity, 
the  adjustment  of  supply  to  the  altered  demand  may  take 
a  long  time  to  accomplish.  It  will  largely  depend  on  the 
economic  position  of  the  locality  ;  if  it  is  progressing,  the 
tax  will  check  building  until  rent  rises  to  its  old  level ; 
but  if  it  happens  to  be  stationary  or  declining  the  burden 

Dd 


402  PUBLIC   FINANCE.  [BOOK  IV. 

remains  on  the  house  owners,  who  are  the  possessors  of  a 
particular  kind  of  fixed  capital.  Again,  even  in  an  ad- 
vancing locality  the  shifting  may  be  on  the  ground  rent. 
The  increase  of  house  rent  that  checks  building  thereby 
reduces  the  demand  for  building  ground,  and  consequently 
lowers  its  value.  It  is  highly  probable  that  some  at  least 
of  the  burden  will  be  so  distributed. 

In  the  case  of  buildings  used  for  production  or  business 
there  may  be  a  further  shifting.  The  taxes  levied  on  factories 
and  shops  form  a  part  of  the  expenses  of  the  manufacturer 
or  trader  and  tend  to  raise  the  prices  of  the  commodities 
supplied  by  him  ;  but  where  the  taxation  is  uniformly  distri- 
buted, a  general  rise  of  prices  from  this  cause  being  impos- 
sible, the  tax  would  not  be  transferred.  As  this  uniformity 
is  never  really  found  there  will  be  a  disturbance  of  values 
through  taxation,  with  an  ultimate  incidence  on  interest 
and  employers'  gains.  The  taxation  of  houses  in  all  countries 
varies  according  to  locality,  and  the  modern  improvements 
in  transport  and  business  organization  have  brought  retail 
prices  nearer  to  a  general  level.  The  result  is  that  the 
shifting  of  building  and  house  taxes  to  consumers  of  com- 
modities is  hardly  possible,  prices  being  limited  by  outside 
competition,  and  it  must  therefore  be  on  the  owners  of  the 
ground,  in  so  far  as  it  does  not  rest  on  the  house  owners, 
traders  and  manufacturers  in  question.  Still  the  levelling 
force  of  competition  is  not  universal,  and  shifting  is  not 
always  possible,  and  it  may  be  that  in  the  influence  of 
taxation  we  have  at  least  a  partial  explanation  of  two  im- 
portant economic  facts :  (i)  the  curious  local  diversities  of 
prices  and  (2)  the  failure  of  various  local  industries 1.  The 
creation  of  various  interests  makes  the  matter  more  com- 
plex. Between  the  ultimate  owner  of  the  soil  and  the 
immediate  occupier  there  are  often,  as  already  noticed, 

1  Fawcett,  Political  Economy  (5th  ed.),  626,  who  gives  the  Thames  ship- 
building trade  as  an  instance.  His  argument  as  to  the  incidence  of  rates  on  the 
consumer  is  based  on  too  rigid  an  interpretation  of  the  doctrine  of  equality  of 
profits. 


CHAP.  II. J  TAXES   ON   CAPITAL  AND   BUSINESS.  403 

several  intermediate  interests,  and  the  house  and  building 
taxes  may  be  placed  on  them  in  different  degrees.  The 
tenant  free  to  leave  can,  if  the  economic  conditions  favour, 
throw  back  his  taxes,  but  the  leaseholder  cannot.  For  this 
reason  legislative  provisions  are  urgently  required  to  secure 
a  due  division  of  burdens  that  the  process  of  shifting  cannot 
fairly  distribute,  and  the  problem  of  devising  a  fair  house 
tax  is  made  more  difficult.  The  policy  of  confining  general 
taxation  of  land  and  houses  to  their  contribution  in  common 
with  other  kinds  of  revenue  to  an  income  tax  appears  to  be 
the  soundest.  Local  Finance  is  thereby  supplied  with  a 
special  kind  of  taxes  and  the  question  of  unequal  valuation 
between  localities  is  reduced  in  importance. 

§  6.  The  taxation  of  land  and  buildings  covers  most  fixed 
capital.  Many  doubtful  points  may  arise  as  to  the  treat- 
ment of  machines  and  fittings,  but  they  usually  come  in 
connexion  with  the  taxation  either  of  mines  (a  form  of  land) 
or  of  factory  buildings,  and  are  taken  as  part  of  a  general 
property  or  income  tax,  or  come  in  as  indications  to  be 
used  in  the  taxation  of  business.  Proposals  to  tax  fixed 
capital  as  such  have  been  made,  but  they  have  not  as  yet 
been  reduced  to  practice.  Apart  from  the  taxation  of  land 
and  buildings  and  the  taxes  on  particular  commodities  we 
have  next  to  examine  the  taxation  of  floating  capital. 

The  question  of  a  tax  on  interest  presents  itself  in  prac- 
tical Finance  chiefly  as  to  dividends  and  mortgages.  They 
represent  the  great  mass  of  wealth  that  is  invested  by  its 
owners  for  gain  without  their  direct  supervision.  Floating 
capital  as  such  is  so  closely  combined  with  other  elements 
and  is  so  hard  to  trace,  that  its  separate  taxation  is  scarcely 
ever  presented.  Unless  this  large  part  of  wealth  is  reached 
in  some  way  there  is  an  undue  encouragement  given  to  it. 
Investments  in  land  and  industrial  enterprises,  are  checked 
and  the  distribution  of  taxation  is  so  far  unfair.  These 
reasons  point  towards  the  adoption  of  the  general  income 
tax,  which  will  necessarily  include  the  revenue  from  floating 
capital. 

D  d  1 


404  PUBLIC    FINANCE.  [BOOK  IV. 

The  separate  taxation  of  floating  capital  for  general  or 
local  purposes  in  a  direct  form  is  not  found  in  England,  but 
Schedule  C  (and  part  of  D)  of  the  income  tax  discharges 
this  function,  and  loans  in  the  form  of  mortgages  come  under 
Schedule  A.  The  yield  of  Schedule  C  for  1889  came  to 
about  ;£i,  1 00,000.  The  taxes  on  acts  are  of  service  as  they 
compel  these  forms  of  wealth,  so  difficult  to  be  reached  by 
direct  means,  to  contribute  to  the  revenue. 

France  has  employed  a  substitute  for  this  part  of  the 
income  tax  in  the  Impot  sur  les  valeurs  mobilieres,  introduced 
in  1872,  by  which  3  per*  cent,  was  imposed  on  the  shares 
of  companies  either  home  or  foreign  ;  the  yield,  which  in 
1 873  was  ^"1,250,000, increased  by  1 880  to  nearly  £i ,600,000 ; 
by  1890  to  over  £2,000,000.  The  rate  has  been  raised  to 
4  per  cent,  for  1891,  and  the  estimate  for  that  year  is 
£2,600,000  or  more  than  double  the  receipts  of  1873. 

Italy,  like  England,  reaches  interest  by  means  of  a  general 
income  tax,  and  such  is  the  usual  method.  In  fact,  one  of 
the  strong  reasons  for  its  introduction  is  precisely  the  desire 
to  make  capital  contribute  its  due  share.  In  some  of  the 
South  German  States  a  special  capital  tax  has  been  deve- 
loped. Bavaria  has  a  capital  tax  besides  its  income  tax, 
and  both  Wiirtemberg  and  Baden  have  somewhat  similar 
imposts. 

The  great  objection  to  a  separate  tax  on  the  yield  of 
capital  is  the  extreme  difficulty  of  making  it  effective.  The 
necessary  result  of  the  ease  with  which  it  is  escaped  is 
injustice  in  its  distribution.  The  French  tax  on  valeurs 
mobilises  falls  on  the  shares  of  companies ;  it  is  a  corpora- 
tion tax  and  tends  to  discourage  those  associations.  In- 
vestments abroad  are  much  more  easily  kept  out  of  the 
tax  collector's  ken,  and  thus  the  progress  of  home  invest- 
ments is  checked.  On  the  whole  the  reasonable  conclusion 
is  that  the  distinct  tax  on  interest  has  no  place  alongside 
of  the  land,  building,  and  business  taxes  that  form  so  large 
a  part  of  the  fiscal  receipts. 

Its  incidence,  which  in  the  case  of  a  complete  and  com- 


CHAP.  II.]  TAXES   ON   CAPITAL  AND   BUSINESS.  405 

prehensive  tax  on  interest  is  on  thejhglders,  (unless  in  so 
far  as  the  supply  of  capital  is  checked  by  the  lower  returns), 
is  affected  by  the  partial  form  that  it  usually  takes.  A  tax 
on  e.g.  mortgages  lowers  the  profitableness  of  that  parti- 
cular kind  of  lending,  and  will  therefore  force  the  mortgagors 
to  pay  at  a  higher  rate  under  the  penalty  of  getting  a  less 
amount  of  accommodation.  Then  the  incidence  will  pro- 
bably be  partly  on  landowners  requiring  loans,  partly  on 
capitalists  in  general,  as  some  of  the  capital  that  would 
have  gone  to  land  will  seek  other  outlets  and  lower  the 
rate  in  them.  The  same  reasoning  applies  to  other  similar 
cases,  taxation  of  corporations  or  any  special  use  of  capital. 
The  question,  already  noticed  in  connexion  with  land,  of  the 
wiping  out  of  the  tax  by  the  sacrifice  of  the  capital  of  the 
original  holders  presents  itself  here.  Stocks  or  shares  sub- 
ject to  a  tax  must  sell  for  less  than  if  they  were  free  from  it, 
and  it  may  be  thought  that  the  transactions  of  the  Stock 
Exchange  speedily  discount  these  public  charges  and  esti- 
mate the  taxed  shares  on  their  net  revenue.  In  dealing  with 
this  case  two  considerations  deserve  notice,  (i)  the  ever 
present  possibility  of  the  repeal  or  alteration  of  the  tax,  and 
(2)  the  extent  to  which  other  primary  forms  of  revenue  are 
burdened  with  like  charges.  If  revenue  from  land,  buildings, 
capital,  and  personal  exertions  is  all  subject  to  the  same 
charge  there  can  be  no  depression  of  their  relative  values. 
The  so-called  c  throwing  off'  (Abwalzung)  of  taxation  means 
simply  that  taxation  as  a  whole  is  a  deduction  from  the. 
resources  of  the  country  where  it  is  imposed. 

§  7.  The  scantiness  of  direct  and  special  taxation  on  loan 
floating  capital  is  further  accounted  for  by  the  greater 
prominence  of  industry  as  an  object  for  the  financier. 
Pure  interest  is  not  so  readily  taxed  as  profits  ;  the  older 
English  writers  have  in  fact  preferred  not  to  separate  this 
compound  element  of  income.  Taxation  of  profits  takes 
the  joint  yield  of  capital  and  business  ability  for  its  object, 
a  course  justified  by  the  close  connexion  that  exists  in 
reality.  The  financier  must  deal  with  external  character- 


406  PUBLIC   FINANCE.  [BOOK  IV. 

istics,  and  as  rent  has  to  be  taxed  through  land,  so  have 
earnings  to  be  selected  in  preference  to  the  more  refined 
elements  of  interest  and  employers'  gains.  The  actual 
taxes  on  industrial  receipts  may  indeed  include  the  several 
factors  of  rent,  interest,  wages,  and  employers'  gain,  since 
both  land  and  labour  may  contribute  to  the  creation  of 
what  is  popularly  and  legally  described  as  *  profit.' 

The  original  form  of  this  taxation  is  found  in  the  licenses 
for  trade  so  common  in  earlier  times.  Traders  who  at  first 
were  supposed  to  pay  the  import  and  export  duties  imposed 
on  their  commodities  were  besides  subjected  to  duties  for 
pursuing  their  particular  avocation.  The  whole  mediaeval 
system  of  incorporations  and  guilds,  which  survived  till  the 
French  Revolution,  placed  certain  burdens  on  those  engaged 
in  industry,  and  the  modern  '  tax  on  business '  may  regard 
this  as  its  precursor.  Within  the  present  century  there  has 
been  a  marked  development  of  this  form  of  taxation,  in- 
fluenced very  much  by  the  French  system  to  be  presently 
described. 

Some  very  difficult  questions  are  raised  by  the  taxation 
of  profits,  questions  that  it  is  to  be  feared  can  in  practice 
admit  of  only  a  partial  solution.  Foremost  of  these  is  the 
ascertainment  of  profits.  Valuation  of  land  and  of  build- 
ings is  a  complicated  and  expensive  process,  but  it  is  light 
compared  with  the  task  of  measuring  the  fluctuating  gains 
of  industrial  production.  It  would  sometimes  be  impossible 
for  the  taxpayer  himself  to  say  what  were  his  gains  in  a 
given  year,  but  a  greater  difficulty  lies  in  his  unwillingness. 
The  unchecked  declaration  of  the  contributor  is  quite  in- 
effectual, while  official  assessment  involves  a  considerable 
amount  of  arbitrary  interference  with  private  affairs.  Taxes 
on  industry  and  profit  as  distinct  from  a  general  Income 
Tax  are  usually  based  on  certain  legal  presumptions.  The 
letting  value  of  the  area  occupied,  the  character  of  the 
business,  the  number  of  persons  it  employs,  the  population 
of  the  district  in  which  it  is  carried  on,  may  be  used 
separately  or  in  combination  as  indices  of  taxable  capacity. 


CHAP.  II.]  TAXES   ON  CAPITAL  AND   BUSINESS.  407 

None  of  these  tests  can  be  expected  to  give  an  exact  result, 
but  they  tend  to  obviate  the  dangers  of  fraud  on  the  one 
hand  and  inquisition  on  the  other.  Productiveness  and  a 
tolerable  approach  to  just  distribution  are  the  two  essentials 
in  taxation :  the  unfairness  that  the  use  of  presumptions 
must  more  or  less  cause  is  perhaps  on  the  whole  a  less  evil 
than  the  encouragement  to  dishonesty  that  self-assessment 
gives.  Moreover  the  gains  of  industrial  occupations  are 
now  too  large  a  part  of  the  national  revenue  to  be  allowed 
to  escape  taxation  without  causing  greater  injustice  than 
their  exemption  would  remove.  Profits  hold  the  place  that 
land  revenues  formerly  occupied. 

§  8.  The  actual  taxation  of  profits  in  England  apart  from 
the  license  duties  on  particular  trades  and  occupations  is 
carried  out  by  Schedule  D  of  the  Income  Tax.  The  former 
element  is  a  small  one  and  is  mixed  up  with  various  direct 
taxes  on  consumption.  Thus  out  of  nearly  £3,000,000 
received  for  the  local  authorities  in  the  year  1889-90  on 
account  of  licenses,  £1,200,000  belonged  to  taxes  levied 
on  consumption,  leaving  £1,800,000  for  industrial  taxation, 
the  similar  taxes  in  Ireland  and  Scotland  being  about 
£400,000  net,  and  as  the  total  return  of  licenses  has  not 
within  the  last  fifteen  years  varied  more  than  3  per  cent,  we 
may  take  £2,200,000  as  representing  the  normal  contribution 
from  this  source,  which  so  far  as  England  and  Wales  are 
concerned  is  a  local  resource  since  1888  1.  Schedule  D, 
which  at  the  present  rate  of  6d.  gives  a  yield  of  £6,000,000, 
is  the  main  tax  on  profits,  but  to  it  the  taxation  of  farmers' 
profits  under  Schedule  B  should  be  added,  though  the 
latter  has  some  points  of  connexion  with  the  strict  land 
tax  under  Schedule  A,  since  the  assessment  is  based  on 

1  More  exact  figures  are — 

Trade  Licenses,  £1,797,600; 
Consumption  and  enjoyment  ditto,  ^1,196,819. 

Some  small  licenses  on  manufactures  have  been  retained  by  the  central 
government,  viz.  brewers,  distillers,  tobacco  manufacturers,  and  medicines.  The 
largest  sum  obtained  by  licenses  (^3,622,217)  was  in  1879,  tne  smallest 
0£3,497>636)  in  1880. 


408  PUBLIC   FINANCE.  [BOOK  IV. 

the  rent1,  and  the  real  incidence  of  the  tax  is  not  clear. 
The  yield  from  this  Schedule  is  not  more  than  £250,000. 
We  thus  get  a  total  taxation  of  less  than  £9,000,000. 

§  9.  The  French  system  of  taxation  of  profits  commenced 
with  the  law  of  March  1791  2.  One  of  the  first  measures  of 
the  Constituent  Assembly  had  been  the  abolition  of  the 
restraints  on  industry,  and  no  intention  of  taxing  it  other- 
wise than  through  the  general  tax,  which  the  mobilier  was 
intended  to  be,  existed.  Fiscal  necessities  forced  the 
establishment  of  the  Droit  de  Patente,  which,  like  the 
mobilier,  was  estimated  on  the  letting  value  of  the  establish- 
ment, the  tax  to  be  10  per  cent,  for  rentals  under  400 
livres,  12!  per  cent,  for  those  between  400  and  800,  and 
finally  15  per  cent,  for  those  above  800  livres.  Abandoned 
in  1793  it  was  restored  in  a  different  form  in  1795.  Subse- 
quent changes  in  1796-7—8  established  the  outlines  of  the 
present  system, which  has  however  been  developed  by  a  series 
of  later  measures  3.  The  tax  applies  to  all  occupations  and 
professions  not  specially  exempted.  It  is  divided  into  a  fixed 
and  a  proportional  duty  and,  unlike  the  other  direct  taxes, 
it  is  'rated,'  not  'apportioned.'  Of  its  four  classes  or 
'  tables '  one  (D)  is  imposed  on  salaries  ;  the  others  em- 
brace the  various  kinds  of  trades.  The  so-called  '  fixed  ' 
duty  is  really  graded.  For  the  first  class  (Table  A)  its 
amount  depends  on  (i)  the  kind  of  trade  and  (2)  the 
population  of  the  commune  in  which  it  is  carried  on,  e.  g. 
a  trader  in  the  first  group  of  Table  A  in  a  commune  with 
over  100,000  inhabitants  pays  £12  (300  francs),  one  in  the 
eighth  group  only  ics.  (i  2  francs).  Were  they  in  a  commune 
with  less  than  2000  inhabitants  they  would  pay  28^.  (35 
francs)  and  is.  8</.  (2  francs)  respectively,  and  the  latter 
would  be  exempt  from  the  proportional  tax.  In  the  second 

1  Half  the  rent  in  England  and  Wales  and  one-third  in  Ireland  and  Scotland 
is  taken  as  the  profit  of  the  farmer,  who  however,  if  he  prefers,  may  be  assessed 
under  Schedule  D. 

2  Under  the  Ancien  Regime  industry  was  taxed  through  the  personal  Taille 
and  the  Vingtiemes, 

3  Most  important  is  the  law  of  1844,  amended  in  1853,  1872,  and  1880. 


CHAP.  II.]  TAXES   ON   CAPITAL  AND   BUSINESS.  409 

class  (Table  B)  special  rates  are  laid  down,  ranging  from 
£80  to  £i9  according  to  business  and  population  of  commune. 
The  third  class  (Table  C)  has  a  fixed  duty  for  each  trade, 
with  additions  for  each  workman  employed. 

The  proportional  duty  is  a  certain  percentage  on  the 
letting  value  of  the  trader's  residence  and  establishment, 
varying  from  10  per  cent,  to  1\  per  cent,  on  the  first 
class,  10  per  cent,  on  the  second,  and  in  the  third  varying 
from  6-60  per  cent,  to  2  per  cent,  imposed  at  different 
rates  on  residences,  warehouses,  and  factories.  Thus  a 
pin  manufacturer  who  falls  under  the  third  group  of 
Table  C  pays  18  francs,  plus  3-60  francs  per  workman 
employed,  5  Per  cent,  on  his  residence  and  separate 
shop,  and  2j  per  cent,  on  his  factory.  A  Paris  banker 
(Table  B)  pays  2000  francs  and  10  per  cent,  on  his  house 
and  bank  1. 

The  object  of  this  very  complicated  system  is  evidently 
to  escape  the  arbitrary  pressure  of  officials.  External 
marks  supply  the  materials  for  assessment,  and  prevent 
the  honest  from  suffering  through  the  evasions  of  other 
tax  payers.  There  is  in  addition  an  advantage  given  to 
the  more  successful  producers  and  traders,  as  their  extra 
gains  are  free  from  taxation.  The  State  assumes  that, 
in  a  given  situation,  so  much  profit  will  be  made,  and 
taxes  accordingly ;  any  defect  or  excess  concerns  the 
trader  alone. 

Certain  gaps  in  the  patente  tax  are  noticeable,  especially 
that  caused  by  the  absence  of  agriculturists.  The  farmer 
is  free  from  this  tax ;  his  profits  do  not  contribute  to  the 
services  of  the  state.  The  impot  fonder  is  a  tax  on  rent 
in  the  main,  and  cannot  be  regarded  as  counterbalancing 
the  taxation  of  industrial  profits. 

In  spite  of  its  complication,  inequalities,  and  failure  to 
include  agricultural  profits,  the  Patente  has  the  two  great 
advantages  of  being  productive,  and  not  very  unpopular. 

1  For  the  Patente  see  Vignes,  i.  52-63,  ii.  333-380;  Leroy  Beaulieu,  i.  393- 
414  ;  Wagner,  iii.  468-489. 


4IO  PUBLIC    FINANCE.  [BOOK  IV. 

As  a  contribution  to  the  State  it  has  risen  from  less  than 
£1,000.000  in  1830  to  over  £2,000,000  in  1860,  and  over 
£4,000,000  in  1885.  The  additional  centimes  for  local 
purposes  have  grown  from  being  under  £30,000  in  1830  to 
£900,000  in  1860,  and  £2,500,000  in  1885.  With  the  small 
extra  items  there  is  thus  a  total  amount  of  about  £6,800,000 
obtained  from  this  source l.  Licenses  are  also  used  in  the 
French  financial  system,  but  their  return,  under  £500,000 
in  1883,  was  only  slightly  over  it  in  1889.  To  these 
should  be  added  the  duty  on  mines,  which  does  not 
amount  to  £100,000. 

§  10.  Italy,  as  already  stated,  has  followed  England  in 
adopting  the  Income  tax.  Profits  come  under  Schedule  B, 
which  comprises  '  mixed  revenues '  as  distinct  from  those 
due  to  capital  or  personal  action  solely,  and  their  taxation 
is  very  imperfectly  carried  out.  Profits  are  taxed  at  f  only 
of  their  amount. 

The  German  states  have  developed  a  tax  on  industry 
(Gewerbesteuer),  probably  suggested  by  the  French  Patente. 
The  Prussian  tax  was  established  in  1810,  and  modified 
after  the  French  war  in  1820.  Its  present  arrangement 
groups  contributors  into  three  classes :  (i)  traders  and 
manufacturers,  (2)  hotel  and  inn  keepers,  and  (3)  hand- 
workers who  employ  assistants.  The  rate  of  duty  varies 
according  to  the  population,  there  being  four  different 
scales.  A  medium  rate  is  fixed  for  each  trade  on  this 
basis,  and  the  total  amount  for  the  district  (arrived  at  by 
multiplying  the  medium  rate  by  the  number  of  contributors), 
is  redistributed  by  the  local  authorities.  Some  industries 
are,  besides,  specially  charged,  while  agriculturists  and  the 
professional  classes  are  exempt.  The  influence  of  the 


1  More  accurate  figures  are — 

FRANCS  (ooo's  omitted). 


1830 
1860 
1885 


Principal. 

23.-Q47 
48,508 


Additional. 

5,209 
31,621 
96,814 


Total. 

28,256 

80,129 

171,916. 


The  additional  centimes  include  those  for  State  purposes,  which  amounted  to 
27,973,000  francs  in  1885. 


CHAP.  II.]  TAXES   ON   CAPITAL   AND   BUSINESS.  4!  I 

Patente  is  clearly  traceable,  but  the  tax  is  much  less  im- 
portant. In  1810  it  returned  only  £90,000,  by  1864  it  had 
risen  to  ,£580,000,  and  in  1887-8  to  £1,000,000,  i.e.  less 
than  one-sixth  of  the  Patente^  or  of  Schedule  D  l. 

Bavaria,  Baden,  and  Wiirtemberg  all  employ  the  tax 
on  industry,  modelled  in  the  main  on  the  French  and 
Prussian  system,  but  there  is  a  decided  tendency  to  prefer 
the  income  tax,  or,  at  least,  use  it  in  addition. 

Austria  and  Hungary  have  also  the  trade  tax ;  in 
the  former  it  gives  about  £1,000,000,  in  the  latter  about 
£2,000,000. 

§  11.  The  principal  features  of  the  taxation  of  profits,  as 
actually  carried  out,  show  that  £vvo  alternative  methods  are 
open.  Either  the  taxpayer  may  be  assessed  on  his  (sup- 
posed) real  net  receipts,  or  certain  external  indications  may 
be  taken  as  a  guide.  The  former  is  generally  found  where 
profits  are  taxed  through  a  general  income  tax.  England 
and  Italy  supply  us  with  the  leading  examples.  The 
difficulties  in  the  way  of  arriving  at  the  true  net  profits 
have  hindered  other  countries  from  completely  following 
this  course.  The  French  method  has  seemed,  if  less 
equitable  in  the  abstract,  yet  in  reality  fairer.  It  does 
not  in  Mill's  phrase  '  tax  conscience.'  Nevertheless  there 
is  a  cumbrousness  and,  in  part,  a  want  of  elasticity  about 
it.  The  long  list  of  trades  coming  under  the  Patente,  with 
the  great  varieties  in  the  permanent  and  the  proportional 
charges,  must  add  to  the  labour  of  administration.  Its 
inequalities  must  also  be  great.  Neither  the  population 
of  the  district,  nor  the  rent  of  residence  and  business 
premises,  can  give  anything  more  than  a  faint  presump- 
tion of  profits.  The  Patente  is  very  far  from  being  a  pro- 
portional tax  on  industrial  gains.  It  rather  resembles  a 
charge  on  certain  necessaries  of  the  business,  such  as 
buildings,  labour,  or  motive  power.  It  accordingly  marks 
a  lower  stage  in  the  development  of  taxation.  The  fair 

1  For  the  Prussian  Gewerbesteuer,  Cohn,  §  307 ;  Wagner  in  Schonberg, 
273;  Taxation  of  Personal  Property  (Misc.  No.  2.  1886,  C.  4909),  8-10. 


412  PUBLIC    FINANCE.  [BOOK  IV. 

assessment  of  profits  may  be  at  present  beyond  the  power 
of  financial  administration,  but  efforts  should  be  made  in 
that  direction.  It  may  be  suggested  that  the  external 
marks,  which  are  now  regarded  as  conclusive,  should  be 
used  as  presumptions,  whose  weight  will  be  affected  by 
other  conditions,  and  it  is  probably  by  this  method  that 
advance  will  actually  be  made. 

Another  noticeable  feature  of  the  continental  taxation  of 
industry  is  its  aid  to  local  revenues.  The  £2,500,000  that 
the  Patente  gives  to  the  French  departments  and  communes 
is  paralleled  on  a  smaller  scale  in  the  case  of  Germany. 
There  the  local  revenues  are  recruited  partly  by  additions 
to  the  direct  taxes,  and,  with  some  exceptions,  this  applies 
to  the  taxation  of  industry 1.  Austria  follows  the  same 
method,  by  which  a  branch  of  income  that  is  free  in 
England  is  compelled  to  contribute  to  the  public  revenues 
of  the  locality  in  which  it  is  situated.  We  have  already 
seen  reason  to  reject  the  plan  of  taxing  income,  or  its 
separate  parts,  locally,  and  it  appears  better  to  use  the 
license  system  for  the  purpose  of  recruiting  local  funds. 
Thus  the  Patente  and  licenses  in  France  might  be  so  re- 
modelled as  to  create  (i)  a  general  tax  on  trade  incomes, 
(2)  a  considerable  local  receipt  from  the  '  fixed '  part  of  the 
Patente,  in  combination  with  a  further  development  of  the 
existing  licenses. 

§  12.  The  incidence  of  taxes  on  industry  is  not  quite 
so  definite  as  writers  on  Finance  often  suppose.  Pure 
or  economic  profit  is  made  up  of  two  distinct  elements, 
and  the  extent  to  which  the  receiver  of  interest  and  the 
earner  of  employer's  gain  can  shift  taxation  is  not  the 
same.  In  the  actual  forms  of  taxation  a  proportional 
tax  on  profit  may  cut  off  more  of  one  element  than  of 
the  other  in  different  cases.  Thus  the  distribution  of 
the  burden  between  interest  and  earnings  may  be  un- 
equal, but  as  regards  outsiders,  shifting  to  them  can  only 

1  Cohn,  §§  461-3;  Reitzenstein  in  Schonberg,  623;  Fournier  de  Flaix, 
401  seq. 


CHAP.  II.]  TAXES   ON   CAPITAL   AND   BUSINESS.  413 

be  effected  by  the  possible  check  to  accumulation  of 
capital.  Where,  however,  taxation  is  not  proportioned 
to  pure  profit  the  effect  may  be  very  different.  It  is 
not  hard  to  understand  that  taxation  so  unequal  as  the 
Patente  may  drive  out  some  of  the  producers,  and  enable 
the  survivors  to  shift  the  charge  to  consumers.  The  tax 
becomes  one  of  the  expenses  of  production.  Again,  the 
local  inequalities  may  allow  of  higher  gains  in  some  dis- 
tricts, and  cause  higher  prices  in  others,  in  which  latter 
case  the  consumer  suffers.  Differences  between  trades 
may,  and  probably  will,  affect  the  distribution  of  industry, 
and  thereby  cause  a  diffused  incidence  too  complicated 
to  trace.  The  same  consequences  must  follow  the  use 
of  taxes  with  different  rates  within  a  connected  area  like 
Germany.  Specially  heavy  taxation  in  one  State  may 
actually,  in  some  degree,  increase  the  profits  of  producers 
elsewhere,  by  raising  the  price  of  the  commodity  within 
one  district ;  but  it  is  still  more  likely  to  press  on  the 
producers  subject  to  it. 

On  the  whole,  the  taxation  of  industry  has  not  ap- 
proached as  closely  to  a  tax  on  pure  profit  as  that  on  land 
has  to  a  tax  on  economic  rent.  This  circumstance  is  partly 
due  to  the  greater  complication  of  the  matter,  but  also 
to  the  less  perfect  development  of  fiscal  methods. 


CHAPTER   III. 
PERSONAL  AND  WAGES  TAXES.  T 


§  1.  OLDER  than  the  taxes  that  we  have"  been  engaged  in 
considering,  but  now  of  little  important,  are  the  capitation 
or  poll  taxes,  so  familiar  to  students  of  mediaeval  finance.* 
Their  origin  is  evidently  found  in  the  idea  that  persons,  as 
such,  should  contribute  to  the  wants  of  the  public  power. 
Capitation  and  property  taxes  were  the  two  great  cate- 
gories of  receipt  in  early  times.  When  the  greater  part  of 
a  community  possessed  little  accumulated  wealth,  the 
method  of  taxing  each  adult  for  a  fixed  sum  was  natural. 
What  is  very  suitable  in  a  rude  state  of  society  is  alto- 
gether unfitted  for  a  progressive  and  civilized  one.  No 
modern  state  could  employ  a  capitation  tax  as  a  sub- 
stantial source  of  revenue.  Its  inequality  and  directness 
combine  to  make  it  unpopular.  The  remains  of  this 
form  of  personal  taxation  are,  however,  very  general, 
though  their  interest  is  rather  historical  or  political  than 
financial. 

The  equal  taxation  of  persons  by  poll  taxes,  or  capitations, 
generally  develops,  either  by  some  form  of  graduation  into 
an  income  tax1,  or,  as  happened  widely  in  the  I7th  century, 
is  replaced  by  an  excise  on  the  necessaries  of  life.  The 
sense  of  proportion  accounts  for  the  former,  as  the  great 
dislike  to  the  capitation  tax  does  for  the  latter.  But  several 

1  It  is  significant  that  Adam  Smith  discusses  the  income  tax  under  the  title 
'  capitation  taxes,'  367. 


CHAP.  III.]  PERSONAL  AND  WAGES  TAXES.  415 

countries,  notwithstanding,  retain  a  small  charge  on  the 
person  of  each  contributor. 

§  2.  English  history  supplies  us  with  some  illustrations  of 
the  poll  tax.  The  first  was  in  1377,  followed  immediately 
by  those  of  1379  and  1380  (the  latter  the  proximate  cause 
of  the  Peasant  Revolt).  The  two  latter  were  graduated 
according  to  rank.  At  intervals  the  graduated  poll  tax 
reappears,  as  in  1453,  J5J3»  anc^  1641-  Its  last  employment 
was  under  William  III  in  the  French  war,  and  it  ceased 
completely  after  1698  1. 

The  French  capitation  was  first  levied  in  1695,  and 
continued  with  changes  up  to  the  Revolution.  It  was 
graduated ;  at  first  twenty-two  classes  were  formed,  but 
this  part  of  the  system  was  altered  in  1701.  The  Con- 
stituent Assembly  created  the  personal  tax  (1791),  which 
consisted  of  the  value  of  three  days'  labour,  and  added 
it  to  the  mobiiier.  The  price  of  the  day's  labour  is  deter- 
mined for  each  commune  by  the  Council  of  the  depart- 
ment, within  the  limits  of  $d.  and  is.  ^d.  No  addition 
can  be  made  for  local  charges,  and  where  an  octroi  is 
levied,  the  personal  tax  may  be  paid  out  of  it.  So  far 
as  can  be  ascertained,  the  total  yield  is  between  £600,000 
and  £700,000  2. 

The  Italian  states  possessed  complicated  capitation  taxes 
which  have  not  survived  the  establishment  of  the  present 
kingdom.  So  did  many  of  the  German  states  3;  but,  at 
present,  the  class  tax  of  Prussia  is  the  most  noticeable. 
The  poll  tax  of  1811  was  replaced  by  the  class  tax  of 
1820,  by  which  the  mass  of  the  population  was  grouped 
in  four  classes,  paying  various  rates,  from  £\  i6s.  to  yd. 
The  income  tax  and  the  class  tax  were  separated  in  1851, 
and  the  latter,  confined  to  incomes  under  £i5°3  was  di- 
vided into  12  classes,  which,  under  the  law  of  1875,  paid 
from  3^.  to  £3  us.,  incomes  under  £21  being  exempt4. 

1  Dowell,  iii.  3-7.  a  Vignes,  i.  40-1. 

3  De  Parieu,  i.  139-151. 

*  By  the  law  of  1891  the  class  tax  is  absorbed  in  the  income  tax  and  incomes 


416  PUBLIC    FINANCE.  [BOOK  IV. 

The  Saxon  income  tax  in  its  lower  part  is  practically  the 
same  as  a  capitation  tax.  The  poll  tax  also  survives 
in  Switzerland,  where  it  is  chiefly  employed  for  local 
purposes,  and  not  in  all  the  cantons. 

Russia,  which  had  long  preserved  the  capitation,  aban- 
doned it  in  1887.  The  nobility  had  been  always  exempt, 
and,  since  1866,  the  commercial  classes.  While  it  was  in 
force  the  rate  varied  from  district  to  district,  and  its  amount 
was  about  ^"9,000,000  (taking  the  rouble  at  its  nominal 
value). 

In  the  United  States  poll  taxes  have  been  used  from  the 
colonial  period.  At  present,  more  than  half  of  the  States 
have  them  in  force,  mostly  for  the  state  or  commonwealth 
revenue,  but,  in  some  cases,  for  the  counties,  and  in  others 
for  education,  or  road  making.  In  four  commonwealths 
the  payment  of  the  poll  tax  is  a  condition  of  the  suffrage1, 
Massachusetts  being  the  best  known  instance. 

In  addition  to  the  taxes  already  noticed,  we  should 
mention  the  services  demanded  by  the  state  from  its 
citizens.  Military  service  is  the  most  prominent,  and  it 
is  a  large  part  of  the  real,  as  distinguished  from  the 
nominal,  cost  of  continental  armies.  The  real  nature  of 
this  service,  as  a  tax,  is  best  shown  by  the  compensatory 
tax  ( Wehrsteuer),  imposed  on  those  who  do  not  serve,  and 
which  has  given  rise  to  so  much  controversy  in  Germany. 

The  method  of  Prestations  in  France  for  the  repair  of 
roads  is  another  example,  and  there  too  the  alternative 
of  working  or  paying  is  open.  The  mediaeval  system 
of  Finance  availed  itself  more  extensively  of  this  direct 
method  of  procuring  resources;  the  surviving  instances, 
in  modern  times,  are — with  the  exception  of  military 
duty — more  curious  than  important. 

§  3.  The  poll  or  capitation  tax  is  far  from  being  a  pure 

under  £60  are  exempted.  The  account  in  the  text  is  preserved  as  illustrating 
the  system. 

1  Seligman,  Finance  Statistics  of  American  Commonwealths,  53;  cp.  Ely, 
Taxation,  209-11. 


CHAP.  III.]  PERSONAL   AND   WAGES   TAXES.  417 

tax  on  wages :  the  taxation  of  professions  through  Sche- 
dule D  of  the  English  Income  Tax,  and  by  the  fourth 
division  (Table  D)  of  the  Patente^  is  a  nearer  approach 
to  that  point.  Attempts  to  reach  the  great  body  of  wage- 
earners  are  generally  made  by  means  of  indirect  taxation. 
The  enforcement  of  a  capitation  tax  is  certain  to  meet 
with,  at  least,  passive  opposition,  and  in  any  case  its 
productiveness  cannot  be  great.  The  method  of  using  it 
as  a  necessary  condition  to  acquiring  full  political  rights 
may  be  admissible  if  the  receipts  are  given  to  local  bodies, 
but  this  regulation  is  political  rather  than  financial. 

The  general  result  is  that  this  form  of  taxation  is  decay- 
ing. Its  persistence  is  due  to  the  financial  conservatism 
that  is  so  strong  in  most  countries.  It  is  altogether  out  of 
place  in  the  general  financial  system,  and  though  it  may  for 
a  long  time  survive  in  some  Swiss  cantons  or  American 
states,  its  importance  will,  we  believe,  steadily  diminish. 

The  incidence  of  personal  taxes,  especially  in  the  form 
of  capitations  on  day  labourers,  has  been  regarded  by  many 
writers  as  wholly  on  the  employers,  or  through  them 
ultimately  on  the  consumers  of  the  products  they  turn 
out,  but  this  conclusion  is  not  by  any  means  certain.  It 
is  far  more  probable  that  a  small  tax  on  the  poorer  classes 
will  lower,  or  prevent  a  rise  in,  their  mode  of  living.  Its 
action  on  population  is  far  too  indefinite  to  be  used  for 
laying  down  an  absolute  rule.  Much  will  depend  on  the  ex- 
act form  of  the  tax,  whether  uniform  or  graduated,  confined 
to  the  head  of  the  family  or  extended  to  its  other  adult 
members.  No  proposition  in  Finance  has  been  more  dan- 
gerous in  its  application  than  that  which  declares  that  the 
labourer  cannot  permanently  suffer  from  taxation. 


E  e 


CHAPTER   IV. 

TAXES  ON  PROPERTY  AND  INCOME. 

§  1.  AT  the  opposite  extreme  to  capitation  or  personal 
taxes  are  those  that  are  imposed  on  property.  The  anti- 
thesis between  '  persons  '  and  '  things '  or,  in  economic 
language,  between  services  and  commodities,  is  apparent  in 
the  earliest  stages  of  society.  When  the'  period  of  con- 
tributions in  kind  is  passed,  the  first  objects  of  taxation 
are  the  persons  and  property  of  the  subjects.  The  pro- 
perty tax  is  probably  older  than  the  separate  charges  on 
the  yield  of  land,  or  capital,  or  even  labour  ;  the  sum  of 
existing  wealth  is  an  easier,  though  not  so  fair  an  object 
for  imposition.  Oxen,  land,  slaves  and  household  goods — 
the  res  mancipi  of  Roman  law — are  the  commodities  that 
first  fall  under,  taxation  :  they  are  on  the  spot,  easily 
estimated,  and  in  most  cases  proportioned  to  the  land 
under  cultivation.  As  society  advances  and  new  forms 
of  wealth  come  into  existence,  the  injustice  of  the  old 
system  becomes  evident,  and  taxation  is  extended  to 
movable  property,  either  by  special  taxes,  or  more  gener- 
ally by  including  it  in  the  category  of  taxable  objects. 
The  difficulties  in  the  way  turn  out  to  be  too  strong  : 
personal  property  gradually  escaped  from  the  duty  of 
contributing  l.  Such  seems  to  have  been  the  fate  of  the 

1  In  Mr.  Dowell's  words  'personal  property  slipped  out  of  assessment/ 
iii.  85. 


CHAP.  IV.]          TAXES   ON    PROPERTY   AND    INCOME.  419 

property  tax  wherever  it  has  been  tried  ;  in  ancient  Rome, 
in  the  various  attempts  in  England,  as  also  with  the  French 
Taille  and  the  later  Dixttmes  and  Vingtttmes  of  the  1 8th 
century. 

This  very  general  tendency  to  disintegration  in  the 
property  tax  is  partly  due  to  its  economical  defects, 
partly  to  technical  difficulties  in  its  administration.  As 
regards  the  former  there  can  be  no  doubt  that,  speaking 
generally,  the  property  tax  is  merely  a  form  of  assessment, 
the  payment  being  really  made  out  of  income.  Taxation 
that  falls  on  capital  in  the  strict  sense  must  diminish  the 
sum  of  the  community's  wealth,  a  process  that  cannot 
continue  indefinitely.  In  using  property  as  the  basis  for 
taxation  there  is  always  a  danger  of  trenching  on  the 
accumulated  resources  of  the  society.  A  second  obstacle 
lies  in  the  fact  that  property  is  not  really  a  fair  gauge  of 
taxable  capacity.  Some  forms  of  wealth  give  a  lower 
return  than  others,  and  in  special  cases  may  even  involve 
outlay.  If,  as  we  saw  x,  income  or  revenue  is  on  the  whole 
a  satisfactory  standard  for  taxation,  a  property  tax,  unless 
carefully  balanced  by  other  charges,  is  unjustifiable.  It  is 
the  result  of  a  confused  idea  as  to  the  true  measure  of 
taxation. 

The  technical  difficulties  result  from  the  nature  of 
property.  In  many  cases  it  is  only  an  abstraction  obtained 
by  capitalizing  revenue.  This  is  preeminently  true  of  the 
great  mass  of  property  that  the  modern  stock  exchange 
deals  in.  Shares  of  companies  and  public  debts  are  only 
of  value  in  consequence  of  their  revenue,  and  their  capital 
value  is  reached  by  a  process  of  estimation  ;  it  is  besides 
constantly  varying  in  a  way  that  does  not  allow  of  precise 
measurement.  Income  is  a  definite  receipt  during  any 
given  period,  and  is  therefore  a  better  object  for  charge. 
The  difficulty  of  reaching  the  multifarious  forms  of  per- 
sonal property  is  a  further  objection.  To  arrive  at  the 

1  Bk.  iii.  ch.  3.  §  12. 

E  e  2 


420  PUBLIC   FINANCE.  [BOOK  IV. 

amount  of  taxable  wealth  and  to  assess  it  fairly  is  quite 
impossible.  The  'slipping  away'  that  always  takes  place 
leads  to  grave  inequalities  and  injustice.  The  owners  of 
certain  forms  of  wealth  are  unduly  burdened  by  having 
to  pay  the  share  of  those  who  have  evaded  their  duty. 
These  are  sufficient  grounds  to  justify  the  very  general 
abandonment  of  the  property  tax  as  a  leading  source 
of  revenue.  Taxes  on  produce  (Ertragssteuern\  such  as 
those  discussed  in  preceding  chapters  of  this  book,  take  its 
place  or  survive  it,  while  they  in  turn  tend  to  develop  into 
the  income  tax. 

§  2.  The  property  tax  has,  however,  maintained  its 
ground  in  two  countries.  Switzerland  still  possesses, 
though  in  most  instances  with  great  modifications,  this 
ancient  method.  The  central  government  does  not  avail 
itself  of  the  property  tax — except  in  the  charge  for 
military  exemption — but  all  the  cantons  employ  it.  The 
usual  title  '  tax  on  property  and  income '  is,  however, 
significant ;  it  marks  the  connexion  between  the  sum  of 
wealth  and  its  annual  return,  and  it  explains  the  object 
aimed  at,  viz.  the  higher  taxation  of  large  and  per- 
manent incomes,  as  well  as  the  assessment  of  '  enjoyment 
capital.'  The  systems  adopted  are  varied,  complex,  and 
often  changed1.  Their  characteristics  will  be  best  under- 
stood by  taking  a  single  canton  and  examining  its  system. 
That  used  in  Zurich  divides  property-holders  into  classes. 
The  lowest,  those  under  ;£8oo,  pay  on  one-half  only ;  the 
second,  those  between  £800  and  £2000,  pay  on  one-half  of 
£800,  and  on  three-fifths  of  the  excess.  Between  £2000 
and  £4000  taxation  is  imposed  on  seven-tenths  of  the 
excess  over  £2000  ;  between  £4000  and  £8000  on  four- 
fifths  of  the  excess.  For  property  under  £16,000  only 
nine-tenths  of  the  excess  over  £8000  is  charged,  while 

1  The  total  mass  of  legislation  and  legislative  proposals  is  quite  over- 
whelming. It  has  been  collected  with  characteristic  thoroughness  in  the 
elaborate  work  of  Schanz,  Die  Steuern  der  Schweiz  (over  2000  pages  in 
5  volumes). 


CHAP.  IV.]         TAXES   ON   PROPERTY   AND    INCOME.  42! 


any  amount  over  £1  6,000  is  charged  at  its  full  value1. 
Under  such  a  scale  the  smaller  properties  escape  very 
easily.  The  Zurich  method  is  modified  in  other  cantons. 
In  Graubiinden  the  lowest  class  is  charged  at  the  '  simple  ' 
rate  ;  in  the  next  class  10  per  cent,  additional  is  placed 
on  the  entire  property;  in  the  third  20  per  cent.,  and  so 
on  till  in  the  eleventh  class  the  rate  is  double.  The  more 
primitive  canton  of  Uri  has  a  higher  rate  of  progression  : 
from  -gV  of  I  Per  cent,  on  property  under  £1200,  it  rises 
to  z\  of  i  per  cent,  on  properties  over  £16,000.  The  town 
canton  of  Bale  makes  but  three  classes  ;  ^  of  i  per  cent. 
is  paid  by  estates  under  £4000  ;  /<r  of  i  per  cent,  on  those 
between  £4000  and  £8000,  and  ^  of  i  per  cent,  on  those 
over  £8000.  In  some  cantons  there  is  no  progression,  all 
properties  being  taxed  at  the  same  rate.  Communal 
taxation  is  also  in  many  cases  levied  on  property,  but  it  is 
rarely  progressive  (e.  g.  in  Zurich  communes  are  forbidden 
to  impose  a  progressive  rate),  and  generally  moderate  in 
amount. 

The  Swiss  system  of  property  taxation  suggests  several 
points  of  financial  interest.  Though  a  long-established 
form,  it  has  been  gradually  adjusted  in  accordance  with 
modern  ideas,  and  is  used  to  supply  gaps  in  the  other 
kinds  of  taxation.  The  aim  of  taxing  permanent  incomes 
at  a  higher  rate  is  accomplished  by  a  tax  that  does  not 
touch  pure  earnings.  Non-revenue  yielding  wealth  is  also 
reached,  and  the  democratic  ideal  of  reducing  the  burden 
on  the  smaller  incomes  is  in  some  degree  realized.  But 
notwithstanding  this  tendency,  the  rates  are  so  moderate 

1  The  following  table  will  show  the  rates  of  charge  — 
Property.       Sum  chargeable. 

&  & 

400  200 

800  400 

1  200  640,  i.  e.  ^  of  800  and  f  of  400 

2000  1  1  20,  i.e.        ,,        ,,       of  1200 

4000  2520,  i.e.  3^  of  the  extra  2000 

8000  572°>  °r  I  oi  the  extra  4000 

16,000  12,920,  or  ^  for  the  extra  8000 

20,000  16,920,  the  extra  4000  being  all  charged. 


422  PUBLIC    FINANCE.  [BOOK  IV. 

that  the  effect  on  capital  is  hardly  perceptible.  Evasion 
perhaps  accounts  for  a  good  deal  of  this  indifference  on  the 
part  of  the  wealthy,  and  shows  that  the  administrative 
system  is  far  from  perfect.  Again,  the  very  narrow  areas 
within  which  the  several  systems  are  applied,  and  the 
small  populations  affected,  make  the  operation  of  the  taxes 
more  difficult  to  use  for  generalization l.  They  are,  in  fact, 
a  remarkable  form  of  local  taxation,  and  should  be  so  re- 
garded. 

§  3.  One  of  the  many  points  of  likeness  between  the 
American  States  or  *  Commonwealths '  and  the  Swiss  Can- 
tons is  their  use  of  the  general  tax  on  property.  But  on 
closer  examination  the  special  differences  are  more  im- 
portant than  the  general  resemblance.  The  American  tax 
is  not  in  any  case  progressive,  and  is  rarely  accompanied 
by  anything  resembling  an  income  tax.  Another  feature 
of  difference  is  the  apportionment  system  adopted  in  the 
United  States.  A  given  sum  has  to  be  divided  over  the 
several  counties  of  a  state  in  proportion  to  their  assess- 
ment, and  the  valuation  of  property  is  in  consequence  put 
at  the  lowest  figure  admissible  by  the  county  officials. 
The  system  adopted  in  Ohio  may  serve  as  an  illustration 
of  the  general  methods.  By  a  constitutional  provision  all 
property  (with  some  insignificant  exceptions)  must  be  taxed. 
To  carry  out  this  law  real  property  is  valued  once  in  ten 
years  by  assessors  appointed  for  the  purpose,  who  are  to 
take  each  plot  'at  its  true  value  in  money.'  As  the 
assessors  in  each  county  compare  results  they  are  probably 
uniform,  but  as  between  different  counties  there  is  often 
great  difference,  which  is  corrected,  though  imperfectly,  by 
a  board  of  equalization.  For  personal  property  an  elabor- 

1  The  following  are  the  areas  and  populations  of  the  cantons  referred  to — 

Area. 


Canton. 
Bale  (town) 
Graubiinden 
Uri  .  .  . 
Zurich  . 


Square.  Miles. 

22 
2774 

4J5 
665 


Population. 

73,749 
94,810 

!7>249 

337^83 


CHAP.  IV.]        TAXES   ON    PROPERTY   AND    INCOME.  423 

ate  series  of  queries  is  issued  to  each  adult,  who  is  bound 
to  answer  them,  and  to  swear  to  the  truth  of  his  return. 
The  numbers  of  cattle,  watches,  pianos,  merchandise,  money, 
stocks,  lands,  &c.,  have  to  be  declared,  and  their  selling 
value  stated  J.  Nothing  could  apparently  be  more  search- 
ing and  effective.  Other  states  possess  tax  laws  quite  as 
rigorous.  In  Georgia  both  land  and  personalty  are  in- 
cluded in  the  queries  issued,  which  moreover  contain  a 
question  as  to  evasion.  Unfortunately  the  universal  ex- 
perience is  that  the  greater  part  of  personal  property  is  not 
returned.  Assessors'  reports,  Governors'  messages,  and 
reports  of  tax  commissions  all  dwell  on  this  fact.  The 
New  York  report  of  Mr.  Wells  in  1871  is  quite  in  agree- 
ment with  the  Maryland  report  of  Professor  Ely  in  1886, 
while  Professor  Seligman  declares  emphatically  that  '  the 
general  property  tax  as  actually  administered  to-day  is 
beyond  all  peradventure  the  worst  tax  known  in  the 
civilized  world  V  The  reasons  for  this  general  condem- 
nation are  not  far  to  seek.  They  are  due  first  of  all  to 
lax  administration.  Officials  elected  for  short  terms  can- 
not be  expected  to  scrutinize  very  closely  the  answers  of 
their  constituents.  Palpably  inadequate  returns  are  ac- 
cepted with  little  question,  and  the  wealthiest  get  off  best. 
*  A  second  cause  is  the  local  nature  of  the  property  tax,  as 
compared  with  the  national,  or  even  universal  movement 
of  the  finer  forms  of  personal  property.  Bonds  and  shares 
are  easily  moved  outside  a  state  during  the  time  of  assess- 
ment, and  more  obvious  forms  of  capital  have  to  be 
leniently  treated  to  avoid  their  emigration.  Mr.  Wells 
has  pointed  out  very  forcibly  the  discouragement  to  capital 
that  the  New  York  system  gave  3,  in  contrast  with  those  of 
Pennsylvania  and  other  adjoining  states;  but  in  practice  the 
pressure  is  very  slight.  One  fact  suffices  to  establish  the 

1  The  above  account   of  the  Ohio  property  tax   is   condensed  from  Ely, 
Taxation,  Pt.  ii.  ch.  4,  which  gives  full  details. 
-  Political  Science  Quarterly,  v.  62  (January  1890). 
3  Report  on  Local  7^axation,  17-18. 


424  PUBLIC    FINANCE.  [BOOK  IV. 

defectiveness  of  the  property  assessments.  It  is  the  decline 
in  the  declared  value  of  personal  property  during  a  period 
in  which  wealth  has  beyond  question  increased  enormously. 
The  personal  property  in  New  York  state  in  1 869  was  as- 
sessed at  $434,000,000,  in  1875  it  had  fallen  to  $407,000,000, 
and  in  1 885  to  $332,000,000,  i.  e.  a  decline  of  over  £20,000,000 
in  the  commercial  centre  of  the  Union.  The  similar  figures 
for  real  property  are,  for  1869  $1,532,000,000,  for  1875 
$1,960,000,000,  and  for  1885  $2,762,000,000,  or  an  increase 
of  nearly  £130,000,000  ! 

The  defects  of  the  property  tax  are,  it  would  appear, 
beyond  remedy,  and  therefore  it  may  be  anticipated  that 
it  will  in  the  future  be  transformed  into  a  land  tax  with 
additional  charges  on  other  selected  receipts,  and  perhaps 
finally  into  an  income  tax.  We  may,  however,  conjecture 
that  a  system  of  state  income  taxes  will  also  fail  owing  to 
the  difficulty  of  localizing  income.  The  conclusion  already 
reached l  that  the  income  tax  is  best  suited  for  the  national 
government  applies  fully  to  the  United  States.  The  most 
promising  sources  of  state  revenue  seem  to  be  the  real 
property  and  license  taxes.  But  whatever  new  forms  be 
adopted  the  property  tax  is  decisively  condemned  2. 

§  4.  The  failure  of  property  taxes  in  so  many  separate 
cases,  and  the  clearer  comprehension  of  income  as  the  true 
normal  source  of  taxation  have  made  the  plan  of  a  general 
tax  on  revenue  or  income  appear  advisable.  We  have 
noticed  the  imperfections  and  dangers  of  the  single  income 
tax  :  it  is  now  rather  as  the  constituent  of  a  general 
system  of  taxation  that  we  have  to  estimate  it.  In  this 
aspect  we  find  that  the  income  tax  is  a  distinctly  modern 
product,  and  one  that  is  likely  to  grow  in  importance.  A 
well-balancecl  financial  system  will  derive  a  large  part  of 
its  receipts  from  direct  taxation,  as  otherwise  an  approach 

1  Bk.  iii.  ch.  6.  §  3. 

2  On  the  whole  subject  of  the  property  tax  see  the  works  of  Wells,  Ely,  and 
Seligman  referred  to  in  Bk.  iii.  ch.  6.  §  3,  361,  n.  i,  also  Seligman's  Finance 
Statistics  of  the  American  Commonwealths,  53-66. 


CHAP.  IV.]          TAXES  ON   PROPERTY  AND   INCOME.  425 

to  just  distribution  would  hardly  be  possible.  Among  the 
objects  of  these  direct  charges  the  produce  of  land,  capital, 
and  labour  must  take  their  place,  and  when  they  have  each 
come  under  contribution  the  elements  of  the  income  tax 
are  present.  The  close  analogy  between  the  four  direct 
contributions  in  France  and  the  five  schedules  of  the 
English  income  tax  is  evident,  and  this  resemblance  ex- 
tends to  the  German  '  produce  taxes.'  There  is,  however, 
one  very  important  difference  ;  the  taxes  on  the  several 
elements  of  wealth  are  far  less  elastic  in  yield.  Thus  the 
French,  Prussian,  and  Italian  land  taxes  have  a  fixity  that 
is  not  found  in  the  income  tax;  and  the  other  produce 
taxes,  though  possessing  more  expansive  power,  are  yet  not 
at  all  as  effective  as  is  desirable ;  the  Patente  expands  more 
slowly  than  Schedule  D.  There  are  besides  various  gaps 
in  the  most  developed  of  the  continental  *  produce  taxes/ 
State  creditors  in  France  escape  taxation,  while  the  Eng- 
lish and  Italian  fundholders  pay  on  that  part  of  their 
revenue.  Mortgages  and  other  forms  of  loanable  capital 
also  manage  to  avoid  their  proper  share,  which  would  be 
impossible  with  the  income  tax.  The  actual  institution  of 
a  tax  on  income  is  not  due  to  refined  consideration  of 
justice :  like  most  imposts,  it  is  the  child  of  necessity. 
When  other  contributions  have  been  carried  to  their  pro- 
ductive limit  the  financier  has  perforce  to  fall  back  on  the 
direct  taxation  of  income.  This  method  is  the  more  neces- 
sary in  a  country  where  taxation  of  the  several  parts  of 
income  is  absent  or  inadequate.  Both  conditions  were  com- 
bined in  the  case  of  the  first  English  Income  tax  (ijgS)1,  and 
were  also  present  in  a  great  degree  in  Italy  in  1864. 

The  result  of  this  originating  cause  is  seen  in  the  use  of 
the  income  tax  as  a  complementary  receipt,  to  be  employed 
in  cases  of  pressure  and  to  meet  what  would  otherwise 
be  a  temporary  deficit.  The  aim  of  keeping  a  correct 

1  *  It  was  in  the  crisis  of  the  revolutionary  war  that,  when  Mr.  Pitt  found  the 
resources  of  taxation  were  failing  under  him,  his  mind  fell  back  upon  the  con- 
ception of  the  Income  tax/  Gladstone,  Financial  Statements,  14. 


426  PUBLIC   FINANCE.  [BOOK  IV. 

balance  of  expenditure  and  receipts  can  be  best  realized 
by  having  a  varying  income  tax  adjusted  to  suit  the 
special  circumstances  of  each  Budget.  Thus  in  England 
the  rate  has  varied  from  is.  ^d.  (if  we  include  the  earlier 
income  tax  from  2s.),  to  id.  per  pound.  Italy  has  been 
unable  to  follow  the  same  course,  as  the  highest  rate  is  in 
her  case  requisite  in  order  to  procure  funds,  but  the  desira- 
bility of  having  a  movable  tax  of  the  kind  is  indisputable. 

Another  advantage  of  the  tax  on  income  is  the  oppor- 
tunity that  it  offers  for  fairly  distributing  the  burden 
yof  taxation.  Indirect  taxation,  and  particularly  that  on 
consumption,  is  heaviest  on  the  smaller  incomes,  and  lets 
the  rich  pass  too  easily.  An  income  tax  with  a  suitable 
scale  of  exemption  goes  far  to  correct  this  inequality,  which 
duties  on  acts  and  inheritances  also  aid  in  remedying. 
Both  on  financial  and  equitable  grounds  there  is  a  strong 
case  for  the  use  of  the  income  tax,  not  as  the  sole  source 
of  compulsory  revenue,  but  in  due  proportion  with  other 
receipts,  and  with  close  attention  to  the  special  circum- 
stances of  the  country. 

§  5.  The  development  of  the  English  Income  tax  throws 
light  on  many  of  the  problems  connected  with  its  general 
use.  Its  history  is  divided  into  two  periods,  (i)  that  of  the 
war  Income  tax  (1798-1816),  and  (2)  that  of  the  peace  tax 
(1842-7).  The  former,  preceded  by  { the  triple  assessment,' 
consisted  at  first  of  a  tax  on  the  sum  of  income  to  be 
ascertained  by  the  taxpayer's  declaration.  A  lengthy 
form  of  return  was  required,  and  a  number  of  deductions 
were  allowed ;  for  repairs,  support  of  children,  insurance  pre- 
miums, &c.  The  yield  was  about  £6,000,000  1,  at  the  rate 
of  10  percent,  on  the  national  income,  estimated  by  Pitt  at 
£102,000,000.  Repealed  at  the  Peace  of  Amiens  in  1802, 
it  was  reimposed  in  1803,  with  the  important  change  of 
substituting  'particular  returns  of  particular  sources  of 


1     1799         .        .      £6,000,000 

1800  .        .        6,250,000 

1801  .         .         5,600,000. 


CHAP.    IV.]         TAXES   ON    PROPERTY  AND   INCOME.  427 

income*  for  the  previous  general  return.  Thus  arose  the 
well-known  five  schedules,  and  inquiry  as  to  the  total 
amount  of  .income  was  avoided1.  The  rate  was  is.  per 
pound  ;  incomes  under  £60  were  exempt,  and  those  under 
£150  taxed  at  a  lower  rate.  The  yield  for  the  first  year 
was  over  .£5,000,000.  In  1 806  the  rate  was  raised  to  2 s.  in 
the  pound,  and  several  changes  in  the  regulations  were  in- 
troduced. The  exemption  limit  was  lowered  to  £50,  and 
the  allowance  for  children  withdrawn,  also  that  for  repairs 
in  Schedule  A.  The  method  of  stoppage  at  the  Bank  was 
applied  to  Schedule  C.  With  the  high  rate  of  charge  the 
yield  was  at  first  £12,000,000;  in  1815  it  had  risen  to 
£15,642,000.  On  the  conclusion  of  peace  the  Government 
desired  to  continue  the  tax  at  half  the  existing  rate,  but 
they  were  defeated  and  had  to  abandon  it. 

The  difficulties  of  English  Finance  during  the  succeeding 
quarter  of  a  century  were  largely  due  to  this  mistaken 
step.  The  retention  of  the  income  tax  would  have  allowed 
reforms  in  other  branches  to  have  been  carried  out  with 
comparative  ease.  Accordingly  competent  opinion  as  ex- 
pressed by  Sir  H.  Parnell  and  Sayer  advised  its  reintro- 
duction  2.  This  prudent  counsel  was  adopted  by  Peel  in 
1842.  His  measure — really  the  old  system  with  unim- 
portant modifications — was  enacted  for  only  three  years, 
and  the  rate  was  fixed  at  *jd.  per  pound  (or  under  3  per 
cent.).  The  yield  in  the  first  year  was  over  £5,600,000, 
the  same  as  at  the  rate  of  10  per  cent,  in  1801.  At  its 
expiry  there  was  an  extension  to  1848,  and  again  to  1851. 
It  was  voted  for  one  year  in  1852;  in  1853  it  was 
extended  to  Ireland,  and  fixed  for  seven  years  by  Mr. 
Gladstone,  who  held  out  the  prospect  of  its  '  relinquish- 

1  They  are — 

Schedule  A.  Owners  of  land,  including  houses. 

„         B.  Farmers,  including  owners  in  occupation. 

„         C.  Fundholders. 

„         D.  Profits  and  professions  and  all  other  gains  unenumerated. 

„        E.  Public  Offices. 
3  See  B.  Sayer,  On  the  Income  Tax,  1831 ;  Parnell,  Financial  Reform,  1830. 


428  PUBLIC   FINANCE.  [BOOK  IV. 

ment '  at  the  end  of  that  term.  The  Crimean  war,  during 
which  the  rate  rose  to  is.  ^d.  per  pound,  prevented  this 
result,  and  since  1860  it  has  been  continued  as  an  annual 
tax  at  varying  rates,  and  it  may  now  be  regarded  as  a 
permanent  part  of  our  financial  system  1. 

In  studying  the  English  Income  tax  the  first  noticeable 
point  is  its  composite  character.  It  is,  in  Mr.  Gladstone's 
words,  '  rather  a  code  or  system  of  taxation  2 '  than  a  single 
tax.  The  five  schedules  may  well  be  regarded  as  so  many 
distinct  taxes,  since  they  deal  with  separate  kinds  of  revenue. 
The  connexion  between  them  comes  out  only  in  cases  of 
exemption  or  abatement.  Inequalities  are,  however,  re- 
moved by  the  comprehensiveness  of  the  tax.  Mortgages 
pay  under  Schedule  A  by  deduction ;  but  there  is  no 
inducement  to  capitalists  to  put  their  wealth  into  the 
forms  included  by  B.  C,  or  D.  as  there  also  they  will  have 
to  pay  on  their  receipts.  Another  important  part  of  the 
system  is  the  extensive  use  of  stoppage  at  the  source.  The 
result  is  that  a  large  body  of  taxpayers  never  receive  the 
sums  due  by  them  to  the  state.  The  public  funds,  dividends, 
mortgages,  are  all  treated  thus,  and  evasion  and  fraud  are 
thereby  reduced  to  a  minimum.  The  separate  sources  of 
income  are  tapped,  and  supervision  is' made  much  easier. 

Thirdly,  we  may  bear  in.,  mind  the  very  large  yield  of 
the  tax.  At  its  commencement  it  contributed  £6,000,000 
in  a  time  of  great  pressure,  whi^  at  present  at  half  the 
rate  it  supplies  close  on  £14,000,000  for  the  public  revenue. 
The  yield  derived  from  the  penny  per  pound  is  in  fact  an 
indication  of  national  progress  ;  from  £700,000  in  1842  it 
has  swelled  to  $2,300,000  in  1891  3. 

1  The  last  time  that  its  existence  was  endangered  was  by  Mr.  Gladstone's 
proposal  of  abolition  in  1874. 

2  Financial  Statements  >  20. 

3  The  following  figures  of  income  assessed  are  instructive — 

Pitt's  estimate,  1798         .  .  .  ^102,000,000 

Amount  assessed,  1842     .  .  .  204,000,000 

Ditto,           1878-9  .  .  578,000,000 

Ditto,           1888-9  .  .  645,000,000. 


CHAP.  IV.]        TAXES   ON   PROPERTY   AND   INCOME.  429 

This  productiveness  accounts  for  its  great  services  both 
in  war  and  peace.  It  supplied  the  means  for  carrying  on 
the  struggle  against  Napoleon,  and  it  rendered  possible  the 
reforms  of  Peel,  besides  saving  the  country  from  deficits  *. 

The  extension  of  exemptions  and  abatements  is  a  further 
interesting  point.  The  original  limit  of  exemption  (£60), 
was  soon  reduced  to  .£50,  in  order  to  include  the  large 
class  who  returned  their  incomes  at  £59  ios.,  and  £200 
was  the  point  at  which  the  full  charge  was  enforced  ;  this 
also  came  down  to  £150  in  1803. 

Under  Peel's  measure  the  exemption  limit  was  placed 
at  £150,  and,  though  subsequently  lowered  to  £100,  it  has 
since  returned  to  the  higher  figure.  In  1863  a  deduction 
of  £60  was  allowed  from  all  incomes  under  .£200 ;  in  1873 
this  was  increased  to  £80  from  incomes  under  ^300 ;  and 
in  1876  to  £120  from  incomes  under  £400. 

§  6.  The  Italian  tax  on  '  movable  wealth '  has  strong 
points  of  resemblance  to  the  English  Income  tax,  and  has 
been  much  affected  by  its  example.  It  commenced  in  1864, 
when  a  sum  of  30,000,000  lire  (£1, 200,000)  was  appor- 
tioned among  the  several  provinces,  and  raised  by  a  tax 
on  revenue  (that  from  land  excepted).  In  1865  the 
amount  was  more  than  doubled  (66,000,000  lire],  and  in 
1 866  the  tax  was  changed  from  an  *  apportioned  '  to  a 
*  rated  '  one,  and  the  rate  fixed  at  8  per  cent.  In  1870 
it  was  advanced  to  12  per  cent,  which,  with  the  additional 
tenth,  levied  since  1868,  made  the  total  13-20  per  cent. 
Many  changes  have  been  made  in  the  methods  of  levy 
and  assessment.  The  original  law  of  1864  has  been 
amended  in  nearly  every  succeeding  year,  until  in  1877  a 
new  and  comprehensive  measure  was  passed  dealing  with 
the  whole  subject.  After  the  English  pattern,  the  con- 
tributors are  grouped  under  several  schedules,  but  the 
arrangement  is  different,  and  used  for  a  different  purpose. 
Class  A  includes,  permanent  revenue,  which  is  assessed 

1  On   the    Income   tax    see  Dowell,  iii.  92-120.     Chailley,   Impfit  sur  le 
Revenu,  89-218,  gives  a  full  and  lucid  account  of  the  English  system. 


430  PUBLIC   FINANCE.  [BOOK  IV. 

at  its  full  value.  Class  B  contains  what  are  called  e  mixed  ' 
revenues,  or  those  in  the  production  of  which  capital  and 
labour  cooperate:  these  escape  with  payment  on  six-eighths 
of  their  amount.  Class  C  contains  revenue  from  labour, 
assessed  at  five-eighths  of  its  total.  The  incomes  of  public 
officials  are  placed  in  Class  D,  and  pay  only  on  four-eighths 
of  their  amount.  To  these  four  classes  should  be  added 
the  Metayers  as  forming  a  fifth.  A  complicated  scale  of 
allowances  for  small  incomes  is  also  part  of  the  system. 
Incomes  under  400  lire  in  classes  B,  C,  D  are  exempt, 
and  up  to  800  lire  the  taxable  sum  is  reduced.  The 
declaration  of  the  contributor  is  the  basis  of  charge,  but 
is  tested  by  inquiry,  and,  as  far  as  possible,  the  tax  is 
collected  by  stoppage. 

Notwithstanding  the  very  elaborate  provisions  of  the  law, 
it  is  found  impossible  to  reach  a  great  deal  of  the  national 
revenue.  Incomes  in  classes  B  and  C  are  very  generally 
returned  at  much  below  their  true  amount.  Like  the  pro- 
perty tax  in  the  United  States,  the  Italian  income  tax  is 
ineffective  through  evasion.  Thus,  though  the  method  of 
stoppage  is  only  applied  to  a  limited  set  of  cases,  its 
receipts  are  nearly  as  large  as  those  from  direct  collection. 
Again,  the  proportion  paid  by  companies  is  about  40  per 
cent,  of  the  whole,  a  ratio  quite  inconsistent  with  all  other 
available  statistics.  An  analysis  of  the  actual  returns  of 
revenue  leads  to  the  same  conclusion.  In  1874  only  639,302 
persons  made  returns,  and  out  of  this  number  only  986,  or 
i  out  of  640,  admitted  incomes  of  more  than  ^1000  per 
annum.  Even  though  the  wealth  of  Italy  is  much  less  than 
that  of  England  or  France,  these  figures  are  quite  inadmis- 
sible and  prove  the  existence  of  fraud  on  a  large  scale. 

One  cause  of  such  widespread  evasion  is  the  very  high 
rate  of  taxation.  The  13-20  per  cent,  is  equivalent  to 
25.  7\d.  per  pound 1,  and  so  high  an  income  tax  would 
even  in  England  lead  to  much  dissimulation  of  income. 

1  I.e.  on  permanent  income;   the  other  groups   pay  at   the   lower   figures 
mentioned  in  the  text. 


CHAP.  IV.]          TAXES   ON    PROPERTY  AND   INCOME.  431 

The  most  obvious  remedy  is  a  diminution  of  the  tax  rate, 
combined  with  greater  powers  of  assessment,  more  par- 
ticularly in  respect  to  professional  and  industrial  incomes. 
The  differentiation  of  the  classes  of  income,  which  origin- 
ated in  an  attempt  to  apply  certain  theories  very  popular 
at  one  time  in  England  l,  also  tends  to  make  the  returns 
inaccurate  and  to  embarrass  the  officials. 

These  drawbacks  notwithstanding,  Italian  Finance  has 
found  a  powerful  resource  in  this  form  of  taxation.  The 
original  £1.200,000  of  1865  has  increased  to  £7,000,000  in 
1875,  to  over  £8,000,000  in  1885,  and  to  over  £9,000,000 
in  1890.  It  must  besides  be  remembered  that  owners  of 
land  are  excluded  from  the  operation  of  the  tax,  since 
they  come  under  the  land  tax  discussed  in  a  preceding 
chapter  2. 

§  7.  The  German  Income  taxes  are  best  represented  by 
those  of  Prussia  and  Saxony.  The  Prussian  Einkommen- 
steuer  was  introduced  in  1851  as  a  development  of  the 
older  class  tax.  It  was  only  applicable  to  incomes  over 
£150,  and  dealt  with  them  by  groups.  A  sum  was  fixed 
for  each  group  amounting  to  3  per  cent,  on  the  lowest 
incomes  in  that  group :  thus  e.  g.  incomes  between  £600 
and  £720  paid  £18,  those  between  £12,000  and  £15,000 
paid  £360,  and  all  incomes  over  £36,000  paid  £1080,  the 
highest  sum  due.  Along  with  the  reform  of  the  class  tax 
in  1873  the  income  tax  was  settled  on  a  somewhat  different 
scale,  but  with  a  general  rate  of  about  3  per  cent.  The 
objections  to  this  system  as  unequal  have  been  so  strong 
as  to  lead  to  the  reform  of  1891,  by  which  the  class  tax3 
is  absorbed  in  the  income  tax,  and  all  incomes  under  £60 
exempted.  From  that  point  the  rate  rises  by  degrees  ; 
between  £525  and  £i475  it  is  3  per  cent. ;  on  incomes  over 
£5000,  4  per  cent.  The  idea  of  progression  is  thus  realized, 

1  This  view  has  received  the  support  of  Newmarch  and  J.  S.  Mill,,  as,  too,  of 
Leroy  Beanlieu  and  Chailley. 

2  For  the  Italian  Income  tax  see  Chailley,  220-344  ;  Alessio,  i.  318-370. 

3  See  Bk.  iv.  ch.  3.  §  2. 


432  PUBLIC    FINANCE.  [BOOK  IV. 

though  in  a  very  limited  way.  The  method  of  assessment 
is  also  changed.  It  was  previously  settled  by  official  valua- 
tion based  on  the  materials  possessed  by  the  administra- 
tion, but  is  henceforth  to  depend  on  the  declaration  of  the 
taxpayer. 

It  is  evident  that  the  Prussian  Income  tax  differs  in 
some  important  respects  from  those  in  England  and  Italy. 
The  function  of  supplementing  the  other  branches  of  re- 
ceipts is  entirely  absent,  as  the  rate  is  fixed,  not  movable 
from  year  to  year.  The  produce  taxes  are  not  brought 
under  the  income  tax,  but  are  continued  quite  separately  : 
the  taxes  on  land  and  industry  present,  accordingly,  ap- 
parent cases  of  double  taxation.  Finally,  the  productive- 
ness is  much  less.  In  1864  the  amount  received  was  over 
£500,000,  in  1876  it  was  nearly  £1,500,000,  in  1884  over 
£1,750,000;  for  1889-90  the  estimate  was  over  £2.000,000. 
Under  the  new  system  (with  the  class  tax  included)  the 
estimate  for  1892-3  is  £4,000,000  \ 

The  Saxon  Income  tax  is  also  a  classified  and  progressive 
one,  but,  unlike  the  Prussian,  it  is  not  accompanied  by  a 
separate  'industry  tax.'  Its  amount  is  about  £750,000. 

Austria  has  had  a  (so-called)  Income  tax  since  1849, 
which  is  a  tax  partly  on  industry  and  partly  on  salaries, 
the  former  at  the  rate  of  5  per  cent,  of  net  gain,  the  latter 
rising  from  i  per  cent,  to  10  per  cent.,  according  to  amount 
of  income.  Its  yield  in  1883  was  about  £2,000,000. 

To  the  foregoing  may  be  added  the  taxes  of  the  Swiss 
Cantons.  Their  property  taxes  already  mentioned  are 
supplemented  by  income  taxes,  in  many  cases  on  a  pro- 
gressive scale.  No  two  cantons  have  adopted  exactly 
the  same  system  in  all  details,  but  there  are,  as  might 
be  expected,  general  points  of  resemblance.  The  Zurich 
Income  tax  follows  the  pattern  of  the  property  tax.  The 
smaller  incomes  are  taxed  on  a  part  only  of  their  amount, 

1  For  the  Prussian  Income  tax  see  Cohn,  §§  315-20,  and  for  the  recent 
reform,  J.  A.  Hill,  '  The  Prussian  Income  tax '  in  Quarterly  Journal  of 
Economics,  vi.  207-26. 


CHAP.  IV.]         TAXES   ON   PROPERTY  AND   INCOME.  433 

and  at  each  higher  stage  the  excess  over  the  preceding 
one  is  placed  under  greater  pressure  until  the  point  of  full 
liability  is  reached.  Graubunden  follows  its  property  tax 
by  grouping  incomes  in  classes  and  by  raising  the  per- 
centage rate  as  they  get  higher.  Switzerland  is  in  fact 
the  classical  country  of  progressive  income  taxes,  though 
the  moderation  of  the  rates,  and  still  more  of  their  applica- 
tion, weakens  the  conclusions  that  might  otherwise  be 
drawn. 

§  8.  We  have  deferred  a  discussion  of  some  fundamental 
questions  relating  to  the  constitution  of  an  income  tax 
until  the  leading  facts  of  its  use  were  known.  Most  of 
them  have  been  already  encountered  in  connexion  with 
the  general  principles  of  taxation,  but  they  take  a  different 
shape  when  the  income  tax  is  treated  as  but  one  part  of 
a  larger  system,  and  need  to  be  handled  specially  with  a 
view  to  that  fact. 

One  important  question  is  that  of  progression  in  the  rate 
of  charge.  The  general  conclusion  that  we  reached  l  as  to 
the  inexpediency  of  any  progressive  system  has  to  be  recon- 
sidered, when  the  income  tax  is  used  as  a  complementary 
resource.  Progression  in  the  case  of  such  a  tax  may  be 
necessary  for  true  proportional  taxation.  If  the  smaller 
incomes  are  unduly  weighted  by  taxes  on  consumption, 
their  exemption,  or  milder  treatment,  under  the  income 
tax  appears  so  far  justified.  A  variation  in  the  rate  of 
charge  is  not  open  to  the  objection  of  arbitrariness,  as 
it  is  determined  by  reference  to  the  amount  of  other 
taxes.  The  other  objections  are  not  so  readily  disposed 
of.  Risk  of  evasion  and  unproductiveness  may  both  be 
urged  against  the  graduation  of  even  a  moderate  com- 
plementary tax.  Where  the  area  is  a  large  one,  the 
effect  on  accumulation  and  investment  will  not  be  serious, 
as  the  distribution  of  taxation  will  ex  hypothesi  be  equal, 
but  the  existing  attempts  at  progression  are,  it  may  be 
said,  hardly  worth  the  trouble  they  involve.  The  English 

1  Bk.  iii.  ch.  3.  §  8. 
Ff 


434  PUBLIC    FINANCE.  [BOOK  IV. 

method  of  exemption  and  abatement  has  great  advantages 
from  the  technical  point  of  view,  since  it  allows  the  sources 
of  income  to  be  taxed  without  reference  to  their  amount. 
The  treatment  of  each  person's  income  as  a  whole  compels 
recourse  to  returns  of  a  complicated  kind,  is  disliked  as 
being  inquisitorial,  and  gives  opportunities  for  escape  to 
large  masses  of  income.  For  these  reasons  the  propor- 
tional rate  is,  on  the  whole,  advisable. 

The  answer  just  given  helps  us  in  deciding  as  to  the 
adoption  of  different  rates  on  different  kinds  of  income. 
The  proposal  that  life  incomes  and  those  derived  from 
industry  should  be  charged  at  a  lower  rate  has  received 
influential  support,  and  is  illustrated  by  Italian  practice. 
When  considering  the  distribution  of  taxation,  we  noticed 
the  general  arguments  as  regards  the  income  tax  in  Eng- 
land. It  was  for  so  long  looked  on  as  a  temporary  charge, 
that  the  idea  of  capitalizing  incomes  subject  to  it  gained  a 
good  deal  of  support.  The  defence  of  the  strict  propor- 
tional rate  rested  on  two  admitted  facts:  viz.  (i)  that  no 
ingenuity  could  avoid  some  injustice,  and  (2)  that  any 
alterations  would  mean  the  destruction  of  the  tax  l.  Its 
gradual  passage  into  a  permanent  charge  has  greatly 
strengthened  its  position  in  this  respect,  though  the  cry 
to  remedy  supposed  grievances  in  its  distribution  may 
gain  greater  support2. 

The  working  of  the  Italian  tax  does  not  support  the 
system  of  different  rates.  The  lower  scales  for  profits 
and  salaries  are  confusing,  and  account  for  much  of  the 
loss  through  concealment  of  incomes.  The  single  general 
rate  would  prove  advantageous  from  a  fiscal  point  of  view, 
and  with  stricter  assessment  could  be  effectually  carried 
out.  The  attempt  to  group  incomes  into  'permanent,' 
6  mixed '  and  '  temporary  '  is,  moreover,  too  rough  to  give 
satisfaction  or  to  realize  justice. 

1  '  The  real  tendency  of  all  these  exemptions,'  said  Mr.  Gladstone,  '  is  the 
breaking  up  and  destruction  of  the  tax,'  Financial  Statements,  45. 

a  A  new  period  of  assault  on  the  alleged  inequalities  of  the  Income  tax 
seems  to  be  approaching. 


CHAP.  IV.]         TAXES  ON  PROPERTY  AND   INCOME.  435 

Allowance  for  necessary  expenditure  and  repairs  is  one 
of  the  practical  difficulties  in  the  administration  of  the 
income  tax.  On  principle,  as  the  tax  is  one  on  income, 
not  on  gross  produce,  deduction  of  the  expenses  of  pro- 
duction of  the  income  taxed  should  be  allowed.  Where 
much  fixed  capital  is  employed,  this  is  very  hard  to 
determine,  and  we  can  understand  the  preference  of 
French  administrators  for  the  self-acting  rules  of  the 
Patente.  In  respect  to  land  the  English  rule  fails  to 
recognise  the  cost  of  repairs  ;  it,  therefore,  treats  this 
class  of  revenue  with  unusual  harshness,  and  gives  some 
support  to  the  view  that  Schedule  A  should  be  regarded 
as  a  distinct  land  tax.  The  exceptional  treatment  of 
farmers'  profits  is  another  fact  that  points  in  the  same 
direction  ;  but  it  may  be  hoped  that  this  anomaly  will 
be  gradually  removed. 

The  exemption  of  savings  has  been  already  dis- 
cussed, but  one  method — that  of  life  insurance — appears 
to  be  a  case  of  capitalization  ;  it  is  in  fact  turning  a  life 
income  into  a  smaller  permanent  one,  just  as  the  purchase 
of  an  annuity  is  the  opposite  process.  Up  to  a  certain 
limit — one-sixth  of  the  income — the  English  system  allows 
exemption  of  insurance  premiums,  a  privilege  not  extended 
to  savings  in  general.  Though  the  desirability  of  en- 
couraging providence  may  be  granted,  it  would  seem  that 
an  exemption  from  duty  on  transfer  after  death  would  be 
a  more  fitting  mode  of  bestowing  the  favour.  It  cannot  be 
contended  that  an  insurance  premium  is  not  a  part  of  in- 
come, and  the  principal  created  by  its  use  will  not  con- 
tribute to  the  payer's  income  in  the  future.  The  case  is, 
as  Mill  puts  it  *,  one  of  concession  to  *  human  feeling,' 
rather  than  a  sound  deduction  from  general  principles. 

The  problem  of  assessment  is  anotiier  of  the  difficulties 
to  be  faced  :  between  the  Scylla  of  the  contributor's  evasion 
under  self-declaration,  and  the  Charybdis  of  official  inquisi- 

1  Bk.  v.  ch.  2.  §  4. 

pfa 


436  PUBLIC   FINANCE.  [BOOK  IV. 

tion,  it  is  hard  to  take  an  intermediate  course ;  but  the 
dealing  with  each  separate  part  of  income,  the  combina- 
tion of  declaration  and  official  control,  and  above  all  the  use 
wherever  possible  of  taxation  at  the  source  of  revenue,  so 
characteristic  of  the  English  method,  are  undoubtedly  the 
best.  The  direct  contact  of  the  citizen  and  the  tax- 
collector  is  the  most  delicate  part  of  the  fiscal  machine, 
needing  care  and  use  of  the  results  of  experience  to 
prevent  friction.  Allowing  for  the  inevitable  margin  of 
error,  the  results  of  the  English  income  tax  are  eminently 
satisfactory. 

§  9.  Any  notice  of  the  question  of  incidence  may  seem 
unnecessary  in  respect  to  a  tax  which  falls  on  all  the 
constituents  of  revenue.  On  whom  can  income  receivers 
in  general  shift  their  burdens  ?  Some  of  the  suggested 
objects  are  certainly  not  available.  Thus  the  vulgar  idea 
alluded  to  by  Mill,  that  the  income  tax  falls  on  the  poor 
by  checking  the  expenditure  of  the  rich,  has  no  foundation 
in  fact.  Nor  is  there  much  force  in  the  contention  that  in 
so  far  as  the  tax  is  paid  out  of  capital  it  falls  on  the 
labourers 1,  as  this  is  no  peculiar  quality  of  the  income  tax, 
but  one  common  to  all  taxation.  The  state  must  obtain 
revenue,  and  unless  the  income  tax  were  specially  obstruc- 
tive to  saving,  it  would  produce  no  peculiar  effect.  Looking 
at  the  subject  in  a  rather  different  way  we  obtain  a  better 
result.  The  income  tax  is  composed  of  taxes  on  rent, 
interest,  profits,  and  the  higher  forms  of  wages,  therefore 
it  may  be  said  that  the  incidence  of  these  several  parts 
of  the  tax  will,  taken  together,  give  the  incidence  of  the 
whole.  This,  however,  brings  us  back  in  a  large  degree 
to  its  non-transferability ;  for  taxes  on  rent,  on  the  higher 
kinds  of  wages,  or  on  employers'  gains,  are  not  easily 
shifted.  Even  in  the^case  of  interest,  unless  the  growth  of 
capital  is  checked,  a  tax  tends  to  remain  on  the  payer. 
Therefore,  speaking  broadly,  we  may  say  that  the  shifting 

1  Fawcett,  Political  Economy,  538  sq. 


CHAP.  IV.]        TAXES  ON   PROPERTY  AND  INCOME.  437 

of  an  income  tax  is  not  to  be  expected,  and  in  the  rare 
cases  where  it  does  happen  is  brought  about,  either  by  a 
check  in  the  growth  of  capital  through  diminished  interest, 
or  by  disturbances  in  the  relations  of  the  several  industries 
and  trades  through  its  action.  A  progressive  income  tax 
will  of  course  have  a  stronger  tendency  to  cause  the  former 
effect. 


-, 


CHAPTER   V. 

TAXES  ON  CONSUMPTION  :  THEIR  CLASSIFICATION. 
DIRECT  CONSUMPTION  TAXES. 

§  1.  THE  income  tax,  as  developed  in  the  present  century, 
marks  the  highest  point  attained  in  the  methodising  and 
skilful  use  of  direct  taxation.  From  the  rude  land,  property, 
and  poll  taxes  up  to  the  existing  system  of  charging  the  net 
receipt  of  the  subject,  regarded  is  a  whole  or  its  several 
.parts,  there  has   been  ^n   unmistakable^  improvement    in 
"justice,  productiveness,  elasticity,  and  that  absence  of  irrita- 
tion that  is  so  important  from  the  political  point  of  view. 
The  natural  order  of  advance  is  in  a  great  measure  the 
historical  course  of  financial  movement.     If  existing  direct 
taxation  is  very  far  from  being  perfect,  it  is,  at  least,  better 
now  than  it  ever  was  before.     The  true  aims  to  be  reached 
are  better  understood,  and  there  is  a  more  intelligent  effort 
made  towards  their  realization.     In  the  present  and  imme- 
diately succeeding  chapters  we  have  to  see  how  far  another 
large  department  of  taxation  has  received  the  benefits  of 
like  improvements.     We  have  spoken  of  the  taxes  already 
discussed  as  being  '  primary  V  since  they  include  all  pos- 
sible parts  of  the  sole  normal  source  of  taxation — income. 
In  contrast  to  them,  the  great  mass  of  charges  imposed  on 
consumption  and  enjoyment,  on  transfers  and  juristic  acts 
is  secondary,  since  in  a  thorough  analysis  its  several  ele- 
ments may  be  decomposed   into  taxes  on  some  form  of 
income.  But  the  realities  of  practical  Finance  do  not  easily 

1  Bk.  iii.  ch.  I.  §  12. 


CHAP.  V.]  TAXES   ON   CONSUMPTION.  439 

adapt  themselves  to  this  mode  of  treatment ;  whatever  be 
the  '  source '  of  taxation,  its  '  objects '  are  many,  and  the 
mode  of  imposition  is  too  important  a  circumstance  to  be 
entirely  neglected. 

The  same  conclusion  is  attainable  from  another  direction. 
The  classification  of  taxes  most  in  favour  in  Germany1 
places  first  those  that  fall  on  wealth  in  the  making,  and  next 
those  imposed  on  its  possession,  and  under  either  of  these 
heads  the  various  taxes  already  examined  would  be  grouped. 
To  these  it,  however,  consistently  adds  an  additional  set  of 
taxes  levied  on  wealth  in  the  using,  and  it  is  to  the  study 
of  this  form  of  taxation  that  we  must  now  proceed.  On 
both  historical  and  financial  grounds  it  is  to  the  full  as  im- 
portant as  the  taxation  of  income  and  property. 

§  2.  The  great  body  of  taxes  on  consumption  is  capable  of 
division  on  several  different  grounds.  Thus  the  kind  of  com- 
modity used  may  be  employed  as  the  basis  of  arrangement, 
giving  the  classes  of  (i)  eatables,  (3)  drinks,  and  (3)  other  ar- 
ticles 2.  The  sub-division  of  the  second  class  into  alcoholic 
and  non-alcoholic  drinks,  and  of  the  third  into  raw  materials 
and  manufactured  articles  naturally  follows.  Another  mode 
of  arrangement  divides  taxes  according  as  they  fall  on  ne- 
cessaries, conveniences,  or  superfluities,  and  is  supported  by 
reference  to  the  important  differences  in  the  economic  and 
social  effects  of  these  different  kinds  of  charges.  From 
a  financial  point  of  view,  however,  the  best  grouping  is 
that  according  to  the  mode  in  which  the  tax  is  levied.  It 
may  (i)  be  obtained  at  once  from  the  consumer,  in  which 
case  it  is,  in  one  use  of  the  term,  direct.  It  may,  on  the 
other  hand,  (2)  be  charged  within  the  country  on  the  manu- 
facturers or  dealers,  who  are  expected  to  shift  the  burden 
to  the  consumers.  Or  again,  it  may  (3)  be  realized  by  a 
state  monoply  of  the  industry  or  sale  ;  while  finally  it  may 

1  Wagner,  ii.  233,  515  ;  Cohn,  §  332. 

2  This  is  probably  the  best  plan  in  a  purely  descriptive  or  historical  treat- 
ment.   It  has  been  adopted  by  Mr.  Dowell  (who  gives  tobacco  a  class  to  itself), 
and  in  great  measure  by  De  Parieu. 


440  PUBLIC   FINANCE.  [BOOK  IV. 

(4)  be  collected  at  the  frontier.  •  It  is  true  that  the  same 
article  may  be  differently  treated  in  different  countries  1, 
but  this  circumstance  does  not  affect  the  general  principle. 
In  fact,  it  is  quite  safe  and  convenient  to  follow  the  usual 
fiscal  practice  and  deal  separately  with  (i)  the  immediate 
taxation  of  enjoyments  and  commodities,  (2)  the  excise  or 
internal  duties,  and  (3)  the  customs. 

The  order  just  given  is  also  the  best  to  adopt  in  a 
scientific  inquiry,  as  the  immediate  taxation  of  consump- 
tion is  the  closest  to  the  direct  taxes  on  property  and 
income,  the  border-line  being  in  some  cases  indistinct. 
This  absence  of  quite  precise  boundaries  has  been  more 
than  once  noticed  ;  the  difficulty  that  it  places  in  the  way 
of  rigid  lines  of  demarcation  is  best  escaped  by  placing  the 
nearest  groups  in  close  connexion  with  each  other.  The 
real  relations  are  in  this  way  best  perceived,  and  the 
grounds  for  the  actual  classification  are  better  understood. 

§  3.  Historically  the  system  of  direct  taxes  on  consumers 
can  be  traced  very  far  back.  The  levies  of  commodities  in 
kind  by  the  sovereign  may,  where  they  consist  of  articles 
used  by  the  contributors,  be  regarded  either  as  taxes  on 
produce  or  on  consumption,  though  the  former  is  the  more 
natural  interpretation.  In  like  manner  the  taxation  of 
movable  property  may  be  regarded  as  a  charge  on  its  use. 
Thus  the  tax  on  consumers'  capital  in  the  shape  of  furni- 
ture, plate,  and  works  of  art  is  plainly  the  same  in  effect  as 
a  tax  on  their  use.  Taxes  on  direct  consumption  and  use 
seem  to  have  originated  in  the  sentiment  to  which  sumptuary 
laws  are  due — the  desire  to  repress  luxurious  expenditure. 
The  first  measure  of  the  legislator  was  to  prohibit ;  when 
that  failed,  the  next  was  to  tax  the  supposed  injurious 
expenditure  2. 

1  Tobacco,  e.  g.  is  free  in  India,  subject  to  excise  in  the  United  States  and 
Germany,  monopolized  in  France  and  Italy,  and  taxed  by  the  customs  in 
England. 

8  Cp.  Cato's  over-valuation  of  articles  of  luxury  after  the  repeal  of  the  Lex 
Oppia,  and  his  taxation  of  them. 


CHAP.  V.]  DIRECT  CONSUMPTION  TAXES.  44! 

There  is  thus  a  double  origin  for  the  existing  taxes  of 
this  kind  ;  they  are  stray  remains,  either  of  the  older 
property  taxes,  or  of  sumptuary  enactments.  With  one 
doubtful  exception  their  financial  value  is  slight.  No 
modern  country  derives  any  noteworthy  revenue  from  their 
use.  The  reasons  for  this  small  return  are  to  be  found 
partly  in  the  development  of  the  excise,  under  which  most 
commodities  are  taxed  in  the  hands  of  the  producer  or 
trader.  By  adopting  this  method  the  state  gains  the  double 
advantage  of  having  to  deal  with  a  smaller  number  of  per- 
sons who  can  be  watched  with  comparative  ease,  and  of 
avoiding  the  annoyance  that  direct  taxation  causes. 
Direct  taxes  on  consumption  seem  to  combine  the  defects 
of  the  two  classes  of  taxes  as  described  in  an  earlier 
chapter l.  They  have  the  unpopularity  and  inelasticity  of 
direct  taxes,  without  the  equality  and  defmiteness  that  are 
the  chief  recommendations  of  the  latter.  Industrial  progress 
has  further  curtailed  their  area.  They  are  the  readiest  way 
of  reaching  commodities  produced  and  consumed  at  home, 
but  this  once  large  group  of  articles  has  shrunk  to  a 
very  narrow  space.  The  factory  system  has  been  destruc- 
tive to  the  method  of  direct  taxation  on  the  consumer. 
Where  large  industry  prevails  the  employment  of  an  excise 
has  very  decided  advantages ;  e.  g.  the  concentration  of 
breweries  has  made  the  license  tax  on  home  brewing  insig- 
nificant. It  may  also  be  remarked  that  the  system  of 
indirect  taxation  through  producers  tends  to  promote 
production  on  a  large  scale.  Heavy  taxation  on  an  in- 
dustry is  a  grave  danger  to  the  smaller  producers 2. 

There  is,  however,  another  reason  for  the  decline  of  the 
direct  consumption  taxes.  They  have  been  in  many  cases 
imposed  on  luxuries,  or,  at  least,  on  the  consumption  of  a 
limited  class.  The  power  of  changing  the  direction  of 
expenditure  is  here  at  its  greatest,  so  that  even  a  moderate 

1  Bk.  iii.  ch.  4.  §§  8,  9. 

2  Leslie,  Financial  Reform,  241-2.     This  is  one  of  the  many  instances  in 
which  economic  forces  act  and  react  on  each  other. 


442  PUBLIC    FINANCE.  [BOOK  IV. 

tax  diminishes  consumption  very  rapidly.  This  fact  ex- 
plains the  small  productiveness  of  the  old  assessed  taxes  in 
England,  though  a  limited  field  of  action  is  still  left  to  this 
particular  fiscal  expedient. 

§  4.  One  important  tax,  which  might  be  regarded  as 
coming  under  the  present  head,  has  been  considered  at  an 
earlier  stage.  This  is  the  tax  on  dwelling  houses  when 
levied  on  the  occupier.  A  very  plausible  case  could  be 
made  out  for  this  view.  A  house  is  as  much  a  commodity 
as  other  more  perishable  articles,  and  it  may  fairly  be 
classed  among  necessaries.  A  great  part  of  the  taxation 
so  collected  comes  out  of  the  occupiers'  pockets,  which 
lends  further  support  to  the  conception  of  it  as  a  consump- 
tion tax.  It  is,  however,  on  the  whole,  more  convenient  to 
deal  with  it  in  immediate  succession  to  the  land  tax,  and  in 
connexion  with  the  taxation  of  buildings  in  general.  The 
difficulties  that  arise  respecting  its  incidence,  and  the  un- 
doubted fact  of  its  falling  back,  under  certain  conditions, 
on  ground  rent  seem  to  justify  that  course.  We  may 
therefore  limit  any  notice  of  it  in  this  place  to  a  reference 
to  the  earlier  discussion  x. 

The  other  English  taxes  of  the  same  character  ori- 
ginated in  the  i8th  century.  Carriages,  men-servants, 
dogs,  and  armorial  ensigns  were  brought  under  taxation, 
and  have  continued  in  the  same  position  up  to  the  present. 
Plate,  horses,  watches,  clocks,  and  hair  powder  have  also 
for  a  longer  or  shorter  time  been  made  contributory.  The 
bare  enumeration  of  these  several  items  shows  sufficiently 
the  character  of  the  taxation.  It  is  imposed  on  certain 
kinds  of  expenditure,  which,  if  not  superfluous,  are,  at  least, 
not  necessary,  and  only  possible  where  a  considerable 
amount  of  wealth  exists.  The  plate  tax,  so  long  as  it  con- 
tinued, was  a  tax  on  one  part  of  consumers'  capital.  The 
licenses  for  killing  game,  and  the  later  one  for  guns  are 
strictly  '  taxes  on  enjoyment,'  and  might  indeed  be  placed 

1  See  Bk.  iv.  ch.  2.  §§  1-5  inclusive. 


CHAP.  V.]  DIRECT   CONSUMPTION   TAXES.  443 

under  the  taxes  on  'acts,'  but  they  find  a  more  natural 
place  in  the  present  group. 

The  fiscal  history  of  this  group  of  taxes  is  instructive.  At 
first  separately  levied  by  special  commissioners,  they  were 
formed  by  Pitt  into  the  '  assessed  taxes,'  and  used  by  him 
as  the  basis  of  his  *  triple  assessment/  which  was  substan- 
tially a  property  tax.  Its  failure  showed  the  defects  of  the 
system,  and  led  to  its  replacement  by  the  income  tax.  In 
the  present  century,  after  many  alterations  and  extensions 
of  exemption,  the  system  of  assessment  has  disappeared, 
and  that  of  licenses  been  substituted,  while  the  latest  event 
in  their  history  has  been  the  transfer  of  the  taxes  to  local 
bodies  in  1888.  Points  for  criticism  abound  in  respect  to 
the  English  consumption  licenses  x,  and  the  taxes  that  pre- 
ceded them.  In  the  first  place  they  are  unproductive. 
The  most  important,  the  carriage  duty,  gives  an  annual 
average  of  £550,000,  the  dog  tax  only  reaches  £340,000, 
and  the  remaining  imposts  make  up  the  general  average  of 
£1,360,000.  They  are  far  better  suited  for  the  purposes 
of  local  taxation,  and  their  transfer  may  be  unreservedly 
approved  of.  But  the  further  question  arises  as  to  their 
fitness  for  use  in  any  part  of  the  financial  system.  They 
have  the  great  disadvantage  of  being  very  often  unequal  as 
between  persons.  It  requires  much  watchfulness  to  prevent 
evasion  in  the  case  of  sporting  and  gun  licenses,  and  ar- 
morial ensigns,  particularly  the  latter.  The  tax  on  male 
servants  is  so  far  a  check  to  their  employment,  and  special 
exemptions  have  to  be  made  for  occasional  hirings.  The 
carriage  tax  is  rather  complex  and  often  presses  unfairly  on 
some  classes.  There  is  either  the  alternative  of  including 
all  vehicles  to  the  injury  of  trade  and  agriculture,  or  where, 
as  at  present,  there  are  large  exemptions,  the  difficulty  of 
administration  is  increased.  A  more  comprehensive  tax, 
such  as  the  horse  and  wheel  tax,  proposed  in  1888,  would 
avoid  much  of  this  difficulty,  and  as  a  local  resource  would 

1  To  be  distinguished  from  the  trade  licenses  noticed  in  Bk.  iv.  ch.  2.  §  8. 


444  PUBLIC   FINANCE.  [BOOK  IV. 

have  the  merit  of  making  the  users  of  roads  contribute 
towards  their  maintenance,  but  its  unpopularity  and  com- 
plicated incidence  are  both  against  it.  The  dog  tax  is 
perhaps,  on  the  whole,  the  least  objectionable,  on  account 
of  its  service  as  a  measure  of  police,  but  for  that  very  reason- 
its  rate  to  be  effective  should  be  so  low  as  to  deprive  it 
of  any  great  financial  value  1.  The  conclusion  suggested 
on  the  whole  is  that  which  recognises  the  consumption 
licenses  as  a  possible  local  contribution,  but  one  entirely 
unfit  for  imperial  taxation.  It  might  be  possible  within 
limits  to  give  the  local  authorities  the  privilege  of  select- 
ing the  particular  articles  to  be  taxed,  and  regulating 
their  number  and  the  rates  of  charge  by  the  needs  of  the 
particular  district. 

§  5.  France  has  made  a  more  sparing  use  of  direct  con- 
sumption taxes,  and  when  employed  they  have  had  a 
sumptuary  aim.  Those  established  under  the  Directory 
were  given  up  in  1807.  Some,  however,  have  been  re-intro- 
duced :  thus  the  horse  and  carriage  tax  was  passed  in 
1862.  A  local  dog  tax  was  enacted  in  1855,  and  the  legis- 
lation as  to  game  licenses  dates  from  1844.  The  tax  on 
servants  has  not  been  restored.  Among  taxes  that  may 
be  placed  in  the  present  category  is  that  on  societies,  intro- 
duced in  1871 — 20  per  cent,  on  the  subscription  of  the 
members — which  is  practically  direct. 

The  revenue  derived  from  these  imposts  is  small,  being 
about  £i, 200,000 2,  though  as,  with  the  exception  of  the 
horse  and  carriage  tax,  they  serve  as  measures  of  police, 
it  may  be  expedient  to  retain  them. 

The  development  of  direct  taxation  of  consumption  in 

1  The  Irish  rate  of  zs.  (with  6d.  additional  for  stamp)  is  for  this  reason 
better  than  the  English  one  of  JS.  6d. 

2  The  respective  contributions  are — 

£ 

Game  licenses  .  .  .  450,000 
Horse  and  Carriage  tax  .  .  400,000 
Dog  tax  ....  300,000 
Tax  on  Societies  .  .  .  60,000. 


CHAP.  V.]  DIRECT   CONSUMPTION   TAXES.  445 

other  countries  is  less  marked.  Taxes  on  dogs,  servants, 
and  carriages,  are  a  part  of  the  optional  communal  re- 
sources in  Italy,  but  their  yield  is  unimportant.  The  dog 
tax,  e.g.  was  in  1883  only  applied  in  about  1400  communes, 
and  produced  less  than  £25,000. 

Prussia  tried  these  forms  of  taxation  between  1810  and 
1814,  but  abandoned  them  at  the  latter  date.  The  tax 
systems  of  the  Empire  present  some  variety  in  the  use  of 
these  taxes,  so  far  as  they  have  been  continued.  The  dog 
tax  is  a  communal  receipt  in  Prussia  ;  it  is  a  state  one  in 
Bavaria  and  Wlirtemberg.  The  amount  obtained  from 
these  direct  taxes  is  inconsiderable. 

In  the  United  States  the  direct  consumption  taxes  are 
assigned  either  to  the  States  or  smaller  divisions,  and  they 
vary  from  State  to  State.  The  almost  universal  employ- 
ment of  the  general  property  tax  does  in  practice  bring 
most  of  the  objects  of  consumption  taxes  under  charge. 
Some  of  the  licenses  so  extensively  used  fall  on  enjoyment 
rather  than  on  trade  or  production,  but  they  are  insigni- 
ficant in  their  yield. 

§  6.  From  the  foregoing  (unfortunately  incomplete) 
notice  of  the  past  and  present  taxation  of  this  kind,  we  get 
a  confirmation  of  the  view  already  expressed  that  it  is  a 
decaying  form  of  impost.  No  modern  State  has  managed 
to  raise  a  large  revenue  by  its  aid  ;  on  the  contrary,  its 
relative  importance  is  much  less  than  formerly.  There  is 
quite  enough  evidence  available  to  prove  that  it  can  with- 
out inconvenience  be  surrendered  to  the  local  bodies  whose 
requirements  make  all  new  resources  desirable,  and  who  at 
the  same  time  have  not  to  meet  sudden  changes  in  expen- 
diture. It  may  even  be  questioned  whether  the  American 
or  German  State  is  not  too  large  a  division.  The  town  or 
rural  commune,  or  at  highest  the  county,  department,  or 
circle  (Kreis),  is  the  proper  area  for  the  application  of  the 
direct  consumption  taxes  collected  within  it. 

There  is  in  fact  a  kind  of  resemblance  between  the  poll 
taxes  and  those  now  under  discussion.  Both  are  employed 


446  PUBLIC    FINANCE.  [BOOK  IV. 

rather  freely  in  early  communities,  but  decay  as  Society  ad- 
vances. The  causes  that  reduce  their  services  are  different, 
though  the  result  is  the  same.  The  poll  tax  is  both  unjust 
and  unproductive  where  wealth  is  unequally  distributed  : 
taxes  on  enjoyments  and  luxuries  are  too  easily  evaded  to 
be  of  practical  use  in  an  advanced  financial  system. 


CHAPTER  VI. 
INTERNAL  TAXES  ON  COMMODITIES. 

§  1.  DIRECT  taxation  of  enjoyment  or  consumption  is, 
as  we  have  seen  in  the  preceding  chapter,  of  comparatively 
little  financial  significance.  In  this  respect  it  presents  a 
marked  contrast  to  that  system  of  indirect  taxation  that 
has  now  to  be  examined.  All  European  countries  rely  on 
what  is  known  in  England  as  '  the  Excise '  for  a  substantial 
part  of  their  revenue  receipts1.  Any  failure  in  this  branch 
of  taxation  would  be  a  fiscal  disaster  very  hard  to  retrieve. 
Even  the  United  States,  which  in  times  of  peace  can  dis- 
pense with  internal  taxation  of  most  commodities,  had, 
under  the  pressure  of  war,  to  apply  this  system  in  a  par- 
ticularly rigorous  form2.  Nothing  but  a  much  higher 
standard  of  morality  in  regard  to  the  payment  of  direct 
taxes,  or  a  very  unlikely  reduction  of  expenditure,  will 
render  the  remission  of  taxes  on  commodities  possible. 
Another  noteworthy  feature  of  the  taxes  under  considera- 
tion is  their  modernness  in  their  present  form.  The 

1  Thus  in  England  the  receipt  from  the  Excise  on  commodities  is,  speaking 
broadly,  30  per  cent,  of  the  total  tax  receipts — .£22,572,000  out  of  ^"76,387,000 
in  the  year  1888-9.     The  contributions  indirectes  and  the  fiscal  monopolies  in 
France  show  for  1889  a  gross  yield  of  .£47,000,000.     Allowing  for  the  expenses 
of  working  the  tobacco  monopoly  and  deducting  the  post  telegraphs  and  the 
taxes  on  communications,  the  balance  remaining  is  over  25  per  cent,  of  the 
total  tax  revenue.     The  German  Imperial  excise  is  of  less  importance,  but  it 
gave  a  return  of  over  ^"6,000,000  in  1887-8. 

2  Bolles,  Financial  History  (1861-1885),  Bk.  i.  chs.  9,  10;  Wells  in  Cobden 
Club  Essays  (2nd  Series),  479. 


448  PUBLIC   FINANCE.  [BOOK  IV. 

English  Excise  is  hardly  250  years  old1,  and  the  corre- 
sponding branch  of  revenue  in  other  countries  cannot  claim 
much  higher  antiquity.  A  reference  to  general  economic 
conditions  supplies  the  explanation  of  their  relatively  recent 
origin.  An  extended  and  productive  system  of  indirect 
taxation  requires  for  its  effective  operation  a  large  de- 
velopment of  money  transactions  with  an  accompanying 
separation  of  employments.  Any  attempt  to  tax  producers 
or  dealers  in  the  expectation  that  they  will  recoup  them- 
selves by  charging  an  increased  price  for  their  wares  is 
obviously  impracticable  where  most  production  is  for 
domestic  use,  and  such  exchanges  as  do  take  place  are 
transacted  by  means  of  barter.  Besides,  the  natural 
tendency  of  financial  policy  is  to  begin  with  customs  duties, 
partly  as  being  easier  to  collect,  but  also  as,  in  the  popular 
belief,  falling  mainly  on  foreign  producers.  A  further  pre- 
requisite for  the  creation  of  an  excise  is  the  formation  of  an 
administrative  organization  capable  of  effectively  super- 
vising the  production  of  the  dutiable  articles  within  the 
territory  of  the  State. 

The  tax  system  is  however,  in  all  its  divisions,  the  result 
of  a  gradual  evolution,  and  therefore  we  need  not  be  sur- 
prised at  finding  earlier  forms  of  taxation  falling  on  the 
production  of  commodities,  and  hence  ultimately  on  con- 
sumers. The  claim  of  the  feudal  over-lord  to  ill-defined 
prerogative  rights  is  one  source.  Market  fees  and  tolls 
were  the  foundation  on  which  a  system  of  indirect  taxes 
could  without  difficulty  be  constructed,  and  the  older  im- 
port and  export  duties  presented  a  convenient  analogy. 
A  charge  on  the  sale  of  a  domestic  article  did  not  seem 
a  greater  violation  of  the  subject's  liberty  than  if  it  were 
imposed  on  the  introduction  of  a  foreign  one.  The  licenses 
on  trades  and  occupations  supplied  another  means  for 
attaining  the  same  end.  When  confined  to  particular 
industries  they  must  evidently  be  regarded  as  part  of  the 

1  The  first  excise  was  created  by  the  Long  Parliament  in  1643,  Dowell,  ii.  8  sq. ; 
Sinclair,  History  of  the  Revenue,  i.  46,  278. 


CHAP.  VI.]         INTERNAL  TAXES    ON   COMMODITIES.  449 

expenses  of  production,  and — unless  there  is  a  differential 
gain — will  be  ultimately  shifted  to  the  consumers  of  the 
products l.  A  license  graduated  in  proportion  to  the  out- 
put or  amount  of  sales  is  hardly  distinguishable  from  a  tax 
on  the  commodity  produced.  The  relations  of  mediaeval 
traders  and  craftsmen  to  their  rulers  and  municipalities 
brought  this  kind  of  taxation  into  use  as  an  expansion  of 
the  general  property  tax.  Still  more  important  was  the 
influence  of  the  quasi-private  receipts  of  the  sovereign, 
which  led  to  the  monopolizing  of  certain  forms  of  produc- 
tion in  order  to  increase  the  royal  revenue.  The  State 
monopolies,  of  which  so  many  examples  are  to  be  found  in 
ancient  and  mediaeval  Finance,  are,  however,  so  far  as  the 
price  of  the  commodity  is  thereby  raised,  nothing  but  a 
special  form  of  taxation.  As  already  explained2,  the 
normal  profit  on  the  capital  employed  is  a  part  of  the 
economic  receipts,  but  any  excess  is  unquestionably  taxa- 
tion. 

In  these  different  ways  the  indirect  taxation  of  consump- 
tion has  been  attempted,  and  the  last-mentioned — monopoly 
— is  even  yet  employed,  as  being,  under  certain  conditions, 
a  convenient  mode  of  levying  taxation. 

§  2.  The  problems  presented  to  the  financier  in  con- 
nexion with  the  whole  system  of  indirect  taxation  are  both 
numerous  and  important  The  earlier  methods  were 
directed  simply  to  obtaining  resources  for  the  immediate 
wants  of  the  State  without  regard  to  the  ulterior  effects  on 
the  economic  position  of  the  nation.  This  irrational  and 
almost  instinctive  procedure  was  soon  replaced  by  attempts 
to  use  taxation  as  a  means  of  guiding  private  expenditure 
in  the  supposed  best  direction.  The  desire  to  employ 
taxation  as  a  moralising  agency  is  even  at  present — as  the 
duties  on  alcoholic  drinks  prove — an  element  of  no  incon- 
siderable weight.  The  proper  development  of  the  taxes 

1  Subject  of  course  to  the  complicated  reactions  discussed  in  Bk.  iii.  ch.  5. 

§5- 

2  Bk.  ii.  ch.  3.  §§  6,  9. 

G  g 


450  PUBLIC    FINANCE.  [BOOK  IV. 

on  commodities  has,  moreover,  been  hindered  by  mistaken 
views  as  to  the  true  effect  and  operation  of  this  part  of  the 
tax  system.  The  earlier  excises  aimed  at  including  all 
the  various  articles  of  consumption :  it  was  thought  that 
the  maxim  of  equality  demanded  nothing  less  than  this 
comprehensive  procedure.  The  often  described  alcavala 
and  bolla  were  imposed,  the  former  on  the  sale,  the  latter 
on  the  manufacture  of  all  kinds  of  goods.  The  excises  of 
the  17th  and  i8th  centuries  were  regarded  by  financiers  as 
the  principal  form  of  taxation,  destined,  if  not  to  replace  all 
other  kinds  of  imposts,  at  least  to  hold  the  principal 
position  in  the  fiscal  system.  Dutch  methods  of  taxation 
had  shown  how  productive  taxation  on  commodities  could 
be  made,  and  the  greater  the  number  of  the  taxed  articles 
the  more  perfect  was  the  system  deemed  to  be.  Popular 
sentiment  by  no  means  agreed  with  this  idea  of  theorists 
and  statesmen.  The  unpopularity  of  direct  imposts  has 
often  been  noticed  as  one  of  their  defects,  but  no  form  of 
taxation  has  ever  excited  more  genuine  dislike  than  the 
'  general  excise '  which  Walpole  was  accused  of  attempting 
to  introduce  into  England.  We  have  seen  the  weighty 
reasons  that  forbid  the  adoption  of  indirect  taxation  on  a 
great  number  of  articles1,  and  here  we  may  add  that  the 
historical  movement  of  the  i8th  century  made  such  a 
course  impossible  as  a  permanent  system  of  Finance.  The 
political  revolution  placed  power  in  the  hands  of  a  class 
that  would  not  tolerate  it,  while  the  less-noticed,  but  quite 
as  important,  industrial  revolution  established  conditions 
under  which  it  would  not  be  endurable 2. 

The  influence  of  economic  doctrines  is  also  to  be  traced 
in    the   later  legislation   on    the  matter.     Without  at  all 

1  Bk.  iii.  ch.  4.  §  5. 

2  The  hostility  of  the  Physiocrats  to  indirect  taxation  was  shared,  so  far  as 
internal  taxation  went,  by  the  other  sections  of  the  liberal  party.     It  is  note- 
worthy that  this  disposition  is  also  found  in  the  labour  parties  of  the  present 
day,  who  resent  taxation  on  commodities  consumed  by  the  working  classes  as 
taxation   of  labour.     Cp.   Lassalle,  Die  indirecte  Steuer  und  die  Lage  der 
Arbeitenden  Classen. 


CHAP.  VI.]         INTERNAL   TAXES   ON   COMMODITIES.  451 

asserting  that  modern  taxation  in  this  department  is  in 
full  conformity  with  the  prescriptions  that  result  from 
economic  principles,  it  may  be  said  that  there  has  been 
a  decidedly  beneficial  remodelling  of  internal  taxation, 
which  has  removed  many  of  the  objections  that  might  be 
urged  against  its  cruder  forms,  and  there  is  every  reason 
to  hope  that  this  progress  will  continue. 

§  3.  The  first  problem  to  be  faced  in  determining  the 
character  and  extent  of  the  taxation  on  commodities  is 
the  number  of  articles  to  be  taxed.  As  we  cannot  with 
prudence  bring  all,  or  even  the  greater  part  of  the  com- 
modities produced  under  duty,  it  is  necessary  to  make 
a  selection,  and  to  do  so  on  certain  definite  principles. 
The  old  and  simple  rule  of  taxing  whatever  is  most  easily 
reached  can  hardly  claim  scientific  justification.  It  is 
the  product  of  fiscal  necessity,  not  of  providence  and 
deliberation.  One  very  important  condition  is  the  amount 
of  revenue  required  ;  the  expediency  of  taxing  a  given 
article  will  always,  in  some  degree,  depend  on  this  con- 
dition. If,  as  we  have  found1,  the  whole  category  of 
indirect  taxes  is  the  outcome  of  the  heavy  expenditure 
of  the  modern  State,  it  is  plain  that  the  greater  the  outlay 
the  more  imperious  will  be  the  calls  of  the  Exchequer  for 
receipts  from  this  source.  With  an  increased  expenditure 
of  £20,000.000  per  annum  in  Great  Britain,  the  exemption 
of  sugar  from  taxation  could  hardly  be  continued.  It  is 
next  necessary  to  settle  the  proportion  that  can  be  obtained 
by  the  various  kinds  of  direct  taxation,  as  well  as  by  those 
further  imposts  that  we  have  grouped  under  the  title  of 
taxes  on  acts  and  communications,  before  we  can  say  what 
sum  must  be  gained  through  the  excise  and  customs. 
This,  again,  suggests  a  fresh  consideration.  From  the 
economic  and  fiscal  point  of  view,  the  existence  of  import 
duties  establishes  the  expediency  of  corresponding  excise 
ones.  Any  other  policy  is  detrimental  to  the  revenue  and 
therefore  to  be  condemned.  We  may,  however,  escape  the 
1  Bk.  iii.  ch.  4.  §  6. 
G  g  2 


452  PUBLIC    FINANCE.  [BOOK  IV. 

discussion  of  this  question  at  present  by  regarding  pro- 
,  tective  import  dues  as  being  equivalent  to  bounties  on 
production,  and  therefore  forming  a  part  of  expenditure1. 
When  the  amount  to  be  raised  through  internal  taxation 
of  commodities  has  been  fixed,  the  more  difficult  question 
of  distributing  the  total  charge  among  the  several  duti- 
able articles,  and  of  saying  what  these  shall  be,  arises. 
One  very  plain  limit  is  supplied  by  the  condition  of 
maximum  productiveness  in  the  case  of  each  article. 
The  rule  of  charging  only  what  'the  commodity  can 
bear '  has  not  always  been  as  carefully  observed  as  it 
should  be,  but  it  is  now  well  understood  that  increased 
rates  may  give  diminished  receipts.  No  single  class  of 
goods  could  yield  the  amount  that  modern  fiscal  systems 
require.  But  it  is  not  merely  the  need  of  attaining  the 
highest  productiveness  that  leads  to  an  extension  of  the 
list  of  dutiable  goods  ;  considerations  of  equity  also  come 
into  play.  The  different  classes  of  society  do  not  expend 
their  incomes  in  the  same  proportion  on  the  many  articles 
of  consumption,  and  even  persons  in  the  same  class  have 
very  different  habits  and  tastes.  A  tax  that  presses  heavily 
on  one  individual  or  class  may  scarcely  affect  another. 
Hence  it  is  necessary  to  make  a  judicious  selection  of 
objects,  in  order  to  secure  a  fair  distribution  of  the  charge 
in  accordance  with  the  general  rule  adopted  as  a  guide. 
The  inclusion  or  exclusion  of  necessaries  will  depend  on 
the  view  taken  as  to  the  treatment  of  the  minimum  of 
subsistence.  If  its  exemption  be  deemed  proper,  all  tax- 
ation that  would  trench  on  it  is  to  be  peremptorily  for- 
bidden :  where  the  duty  of  all  to  contribute  to  the  service 
of  the  State  is  recognised,  duties  on  such  articles  as  corn 
and  salt  may  be  the  easiest  way  of  enforcing  that  responsi- 
bility. At  the  opposite  extreme,  the  mode  of  dealing  with 
articles  consumed  only  by  the  rich  will  be  affected  by  the 
amount  already  obtained  through  income  and  property 

Cp.  Bk.  i.  ch.  6.  §  3 ;  and  for  a  notice  of  the  fiscal  aspects  of  protection, 
ch.  7.  §  2  of  the  present  book. 


CHAP.  VI.]         INTERNAL   TAXES   ON   COMMODITIES.  453 

taxes  and  duties  on  the  transfer  of  wealth,  and,  too,  by 
the  extent  to  which  the  idea  of  progressive  taxation  is 
accepted.  Heavy  imposts  on  luxurious  expenditure  tend 
to  press  more  heavily  on  the  rich,  and  are  in  principle 
the  same  as  a  progressive  income  tax  *,  though  their  actual 
operation  may  vary  more  according  to  circumstances. 

The  main  brunt  of  indirect  taxation  will,  in  most  modern 
communities,  fall  on  the  great  intermediate  class  of  goods 
that  form  the  staples  of  consumption.  It  is  one  of  the 
earliest  observations  in  Finance  that  taxation  on  the 
expenditure  of  the  working  classes  will  yield  much  better 
results  than  that  which  is  placed  on  the  apparently  more 
profitable  outlay  of  the  comparatively  few  rich  persons  2. 
The  objects  of  general  expenditure  must  be  brought  under 
contribution,  in  order  to  secure  the  high  return  that  is 
needed  as  a  justification  for  the  imposition  of  so  vexatious 
a  system  as  the  excise. 

We  thus  reach  rather  limits  within  which  the  field  of 
taxation  has  to  be  kept,  than  direct  indications  as  to  the 
articles  and  rates  to  be  imposed.  Another  class  of  con- 
siderations will  help  us  to  make  some  further  progress. 
An  excise  system  must  depend  largely  for  its  success  on 
the  technical  conditions  of  the  industries  that  it  supervises. 
Where  industrial  improvement  is  rapid,  the  restrictions 
needed  for  the  protection  of  the  revenue  are  felt  as  a 
serious  hindrance.  The  adoption  of  new  processes,  so 
necessary  for  the  most  effective  production,  is  not  readily 
carried  out,  and  the  system  of  taxation  violates  the  maxim 
of  '  economy '  by  inflicting  loss  on  the  community  without 
corresponding  gain  to  the  State.  The  only  escape  is  found 
in  restricting  the  objects  of  taxation  to  a  small  number  of 
articles,  and  in  so  choosing  them  as  to  include  only  those 
industries  in  which  invention  is  not  very  active,  or  in  which 
interference  with  it  will  not  be  seriously  felt. 

Again,  it  is  evident  that  some  commodities  are  far  more 
closely  connected  with  the  work  of  production  than  others. 

1  Bk.  iii.  ch.  3.  §  6.  a  Wealth  of  Nations,  375. 


454  PUBLIC    FINANCE.  [BOOK  IV. 

A  duty  on  manufactured  silk  would  obviously  have  less 
effect  on  industry  in  general  than  one  on  iron.  The  former 
would — apart  from  its  diffused  effects — only  concern  the 
producers  and  consumers  of  silk  goods  ;  the  latter  would 
affect  almost  every  industry  of  importance  by  enhancing 
the  price  of  one  of  the  most  essential  auxiliary  materials  of 
production.  This  contrast  between  auxiliary  articles  and 
i  those  destined  for  direct  consumption  l  leads  to  the  rule 
•  .that  taxation  of  raw  materials  or  goods  that  aid  production 
should,  as  far  as  possible,  be  avoided.  Not  only  are  the 
real  effects  of  duties  on  such  articles  harder  to  estimate  : 
there  is  the  further  evil  that  the  taxes  have  to  be  advanced 
by  the  producers  for  a  longer  period,  and  the  ultimate 
increase  of  cost  to  the  consumer  is  made  greater  by  the 
interest  on  those  advances.  It  is  true  that  the  State 
receives  the  money  at  an  earlier  time,  but  its  gain  is  not 
sufficient  to  counterbalance  the  loss  through  interest  on 
the  locking  up  of  what  would  otherwise  be  active  capital. 

The  system  of  taxing  commodities  is  consequently  most 
effective  when  it  is  confined  to  a  comparatively  small 
number  of  goods,  which  form  the  typical  objects  of  the 
general  expenditure  of  the  various  classes  and  grades  of 
the  community,  and  which,  at  the  same  time,  are  not 
important  elements  in  auxiliary  capital.  The  production 
of  these  goods  must,  moreover,  not  be  in  a  very  scattered 
form,  and  in  the  hands  of  small  producers,  as  excise  super- 
vision then  becomes  too  burdensome  to  the  industry  and 
too  costly  to  be  effective.  All  the  real  objects  of  taxation 
on  commodities  can  be  accomplished  without  including 
many  items  in  the  list  of  dutiable  goods.  Productiveness, 
economy,  and  equity,  are  the  ends  in  view ;  and  they 
cannot  all  be  secured  without  this  limitation  of  the  field  of 
the  tax  collector ;  while  equity,  which  seems  to  be  violated, 
is  really  and  substantially  attained  by  a  small  as  well  as 

1  For  Economics  this  distinction  has  been  worked  out  by  Menger,  who 
grades  commodities  in  '  orders '  according  to  their  nearness  to  the  consumer, 
cp.  Marshall,  Principles  of  Economics,  109. 


CHAP.  VI.]         INTERNAL   TAXES   ON  COMMODITIES.  455 

by  an  extensive  number  of  taxes.  One  article  of  general 
consumption  is  a  better  object  for  purposes  both  of  revenue 
and  justice,  than  thirty  or  forty  minor  commodities  on 
which  the  cost  of  collection  would  be  high  and  the  ultimate 
incidence  uncertain. 

The  last  important  influence  that  affects  the  selection  of 
the  objects  of  indirect  taxation  is  the  desire  to  discourage 
certain  forms  of  outlay  that  are  regarded  as  pernicious,  or, 
to  take  the  mildest  view,  not  promotive  of  economic  or  other 
virtues.  This  idea,  which  lies  at  the  root  of  all  sumptuary 
taxes,  is  represented  in  modern  Finance  by  the  treatment 
of  intoxicating  drinks  and  tobacco.  In  nearly  every  country 
these  articles  form  the  mainstay  of  the  revenue  from  in- 
direct taxation,  owing  to  the  two  conditions  of  large 
consumption  and  heavy  taxation.  So  far  has  this  move- 
ment been  carried  in  England,  that  it  is  quite  within  the 
limits  of  probability  that  both  excise  and  customs  may 
soon  be  confined  to  these  commodities  of  doubtful  ad- 
vantage, as  the  former  virtually  is  l.  Though  the  French 
contributions  indirectes  have  a  broader  basis,  they  are  yet 
largely  dependent  on  the  wine  and  spirit  duties  ;  while  the 
tobacco  monopoly  is  highly  productive.  The  United  States 
and  Russia  have  their  internal  revenue  in  a  similar  posi- 
tion, and  the  inferior  yield  in  Germany  is  admittedly  one 
of  the  weak  points  in  the  fiscal  system  of  that  Empire. 

§  4.  One  result  of  the  preceding  inquiry  as  to  the 
conditions  that  should  be  taken  into  account  in  framing  a 
system  of  duties  on  commodities  is  to  give  strong  support 
to  the  position  that  such  duties  must  be  varied  according  ^ 
to  the  country  in  which  they  are  applied.  The  really  pro- 
ductive objects  of  taxation  are  not  quite  the  same  in  any 
two  countries.  The  tastes  and  habits  of  each  community 
have  to  be  carefully  observed  and  taken  into  account, 

1  Some  license  duties  and  that  on  the  railway  receipts  from  passengers  are 
placed  under  the  excise,  but  they  really  belong  to  another  category  of  taxes 
(see  ch.  8  of  the  present  Book).  The  tea  duty  is  the  only  productive  part  of 
the  customs  outside  spirituous  liquors  and  tobacco,  and  its  yield  is  much 
diminished  by  the  reduction  to  ^d.  per  Ib.  made  by  Mr.  Goschen  in  1890. 


456  PUBLIC    FINANCE.  [BOOK  IV. 

otherwise  the  revenue  receipts  will  suffer.  But  the  financier 
has  not  merely  to  study  the  direction  of  demand  ;  he  must 
further  pay  attention  to  the  agencies  of  supply.  The  system 
required  for  a  wine-producing  country,  such  as  France  or 
Italy,  is  not  the  same  as  that  best  fitted  for  districts  in 
which  alcohol  is  produced  by  an  elaborate  manufacturing 
process.  Adjustment  to  the  economic  environment,  so 
exceedingly  desirable  in  the  arrangement  of  taxation, 
necessitates  the  adoption  of  special  taxes  in  different  cases 
in  order  to  gain  the  best  results. 

The  same  point  is  further  enforced  by  the  varying 
amount  of  revenue  that  is  required,  and  the  extraordinary 
differences  in  the  amount  of  consumption  on  which  taxa- 
tion can  be  imposed.  The  exemption  of  necessaries  from 
duty  must  be  contingent  on  the  power  of  obtaining  the' 
required  amount  from  other  objects.  Thus  salt,  which  is 
rightly  free  in  England,  has  to  be  taxed  in  India  owing  to 
the  absence  of  other  resources,  and  sugar,  released  from 
taxation  in  Great  Britain  in  1875,  would,  in  case  of  financial 
pressure,  be  one  of  the  most  eligible  objects  for  imposition. 
The  true  test  of  financial  competence  is  to  be  found  in 
the  application  of  the  general  principles  to  the  varying  cir- 
cumstances of  each  particular  nation  in  such  a  way  as  to 
realize  the  ends  of  a  sound  and  prudent  policy. 

The  modern  developments  of  financial  conditions  have, 
it  must  be  said,  tended  to  bring  about  a  greater  approach 
to  uniformity  in  the  taxation  of  consumable  commodities, 
both  in  respect  to  the  objects  taxed  and  the  procedure  em- 
ployed. Economical  and  political  causes  have  both  con- 
tributed to  this  result.  The  modern  industrial  system 
with  its  uniform  and  mechanical  methods  of  production, 
the  general  diffusion  of  a  taste  for  articles  of  convenience, 
and  the  formation  of  powerful  fiscal  administrations  have 
all  helped  to  make  the  excise  systems  of  European  States 
more  nearly  resemble  each  other.  Scientific  investigation 
has  also  aided  in  producing  this  situation.  The  skilled 
financial  advisers  of  a  government  are  acquainted  with,  and 


CHAP.  VI.]         INTERNAL   TAXES   ON    COMMODITIES.  457 

ready  to  adopt,  what  is  effective  in  the  forms  and  methods 
of  other  nations. 

Even  greater  progress  in  this  direction  may  be  antici- 
pated in  the  future.  We  may  not  unreasonably  hope  that 
some  of  the  anomalies  at  present  existing  will  be  removed, 
and  that  by  due  co-ordination  and  uniformity  in  method 
the  hindrances  to  production  and  exchange  that  indirect 
taxation  now  causes  may,  if  not  entirely  removed,  be  at 
least  reduced  to  a  minimum. 

§  5.  The  freedom  of  this  country  from  internal  taxation 
of  commodities  was  one  of  the  boasts  of  Englishmen  so  late 
as  the  seventeenth  century.  Under  Elizabeth  the  granting 
of  monopolies  was  the  first  step  towards  what  might  have 
become  an  effective  system  of  taxation,  but  this  encroach- 
ment was  successfully  opposed.  The  introduction  of  the  ex- 
cise on  the  Dutch  model,  said  to  be  the  proposal  of  Pym, 
was  due  to  the  needs  of  the  Parliament  in  its  struggle  with 
Charles  I  ;  it  included  a  large  number  of  articles  of  necessary 
consumption,  chiefly  food  and  clothing.  Retained  during 
the  Protectorate,  with  some  modifications,  as  an  important 
source  of  revenue,  the  excise  was  re-established  after  the 
Restoration  in  the  form  of  a  tax  on  beer  and  ale,  partly  as 
a  compensation  for  the  abolition  of  the  feudal  dues,  and 
partly  as  a  resource  for  the  growing  needs  of  the  Sovereign  1. 
At  the  close  of  the  reign  of  Charles  II  the  yield  of  these 
taxes  was  £620,000. 

Whatever  may  have  been  the  advantages  of  the  Revolu- 
tion of  1688,  reduction  in  the  burden  of  taxation  was  not 
one.  The  cost  of  the  French  war  and  the  entanglement  of 
England  in  the  European  disputes  respecting  the  Balance 
of  Power,  along  with  the  Colonial  and  commercial  policy 
that  resulted  from  the  predominance  of  the  monied  interests, 
largely  augmented  the  annual  expenditure.  During  the 
eighteenth  century  the  process  of  building  up  the  excise  by 
the  inclusion  of  fresh  articles  and  the  increase  of  the  rates 

1  The  hereditary  excise  had  the  former,  the  temporary  excise  granted  for  the 
life  of  the  King  the  latter  object,  but  the  distinction  was  only  a  formal  one. 


458  PUBLIC   FINANCE.  [BOOK  IV. 

on  those  already  taxed  was  in  process.  Breweries  and  dis- 
tilleries were  soon  placed  under  charge  ;  the  malt  duty  was 
imposed  (1697),  and  later  on  developed  into  an  important 
tax.  Several  articles  of  necessary  consumption  were  brought 
within  the  fiscal  net.  Salt,  leather,  soap,  and  candles  are 
enumerated,  and  their  taxation  condemned,  by  Adam 
Smith  l.  The  extension  of  the  system  was  however  carried 
on  in  a  tentative  way  ;  new  taxes  were  tried,  and  if  they 
proved  to  be  unpopular  or  unproductive  were  repealed, 
perhaps  to  be  soon  re-imposed  under  more  favourable  cir- 
cumstances. The  best  known  incident  in  this  part  of  fiscal 
history — Walpole's  excise  scheme — was  really  a  reform  in 
the  customs  treatment  of  tea  and  tobacco,  and  excited 
prejudice  rather  by  what  it  seemed  to  lead  to,  than  by 
its  actual  provisions.  The  financial  result  of  the  many 
measures  passed  respecting  the  excise  during  the  eighteenth 
century  is  best  shown  in  the  increased  receipts.  At  the 
commencement  of  that  period  they  had  averaged 
£i, 200,000 2:  by  1792  they  had  risen  to  £10,000.000. 
From  the  latter  date  the  extraordinary  drain  of  the  Revo- 
lutionary war  with  France  affected  the  financial  policy  of 
the  country,  and  caused  those  fresh  applications  of  taxation 
that  have  been  so  often  described  by  historians.  The 
existing  rates  were  in  nearly  every  case  raised  to  the 
highest  productive  point  (often  as  experience  proved 
beyond  it).  The  duty  on  salt  was  doubled,  and  later  on 
again  subjected  to  a  50  per  cent,  increase.  Glass,  tiles,  and 
leather  were  also  made  liable  to  additional  charges.  Beer 
and  ale,  as  might  be  expected,  received  specially  severe 
treatment.  At  the  commencement  of  the  French  war  the 
various  taxes  on  these  articles  or  their  constituents  yielded 
£3,578,000  :  in  1815  they  came  to  almost  £9,600,000.  The 
spirit  duties  were  trebled  during  the  course  of  the  war, 

1  Wealth  of  Nations,  369. 

2  *  The    revenue   from   inland   duties  had  varied   considerably  in  different 
years.     In  1700  over  a  million,  it  was  in  1702  nearly  ,£1,400,000,'  Dowell, 
ii.  62. 


CHAP.  VI.]         INTERNAL   TAXES   ON   COMMODITIES.  459 

until  in  1811  they  stood  at  JQS.  z^d.  per  gallon,  or  almost 
the  present  rate  l. 

Such  very  great  increase  of  taxation,  accompanied  as  it 
was  by  corresponding  advances  in  respect  to  other  classes 
of  imposts,  could  not  long  survive  the  return  of  peace, 
aided  by  the  application  of  proper  fiscal  methods.  Unfor- 
tunately the  abandonment  of  the  income  tax  and  the  inju- 
dicious methods  of  borrowing  pursued  by  Pitt  and  his 
successors  made  reform  a  work  of  some  difficulty.  The 
debt  charge  of  ^3  2,000,000  and  the  heavy  military  and 
naval  expenditure,  not  readily  brought  back  to  a  peace 
footing,  both  hindered  immediate  remissions  or  exemptions. 
The  national  industries  had,  besides,  become  adjusted  to  this 
very  heavy  taxation,  and  caution  was  needed  in  the  attempt 
to  alter  the  situation.  At  first  the  want  of  revenue  was  so 
great  that  certain  excise  duties  were  increased,  e.  g.  those 
on  soap,  malt,  and  British  spirits.  This  extreme  pressure 
did  not,  however,  last  long,  and  it  became  possible  to  carry 
out  some  moderate  reforms.  The  salt  duty  was  reduced, 
and  its  abolition  fixed  for  an  early  date  (1825).  That  on 
leather  was  lowered  one  half,  and  the  very  high  tax  on 
British  spirits  (us.  8J</.  per  gallon)  was  placed  at  Js.  in 
order  to  meet  the  illicit  trade  and  in  connexion  with  the 
lower  duties  on  wine.  The  exertions  of  Huskisson  were, 
however,  chiefly  directed  towards  the  improvement  of  the 
customs,  which,  indeed,  most  urgently  required  reform. 
The  internal  taxes  were  not  directly  affected  by  the  disturb- 
ing influence  of  the  protectionist  system,  and  therefore  the 
changes  to  be  carried  out  were  of  a  comparatively  mode- 
rate character.  They  may  be  said  to  consist  in  :  (i)  the 
elimination  of  raw  materials  from  the  list  of  goods  liable  to 
duty  ;  (2)  the  contraction  of  that  list  to  a  very  small  number 
of  articles,  and  (3)  the  placing  of  the  weight  of  internal 
taxation  on  intoxicating  drinks.  A  further  aim  has  been 
to  secure  a  complete  harmony  between  the  excise  and 

1  For  the  details  of  these  taxes,  Dowell,  ii.  208-245,  and  vol.  iv.  under  the 
several  heads. 


460  PUBLIC   FINANCE.  [BOOK  IV. 

customs  systems,  which  has  been  reached  by  the  abandon- 
ment of  protection  and  the  establishment  of  exactly  equiva- 
lent duties  in  both  departments.  In  fact,  that  substantial 
unification  of  the  excise  and  customs  for  which  Walpole 
vainly  risked  his  popularity  has  been  definitely  accom- 
plished so  far  as  financial  effectiveness  is  concerned. 

Some  of  the  facts  of  this  reform  of  the  excise  are  not 
without  interest.  After  the  disappearance  of  the  salt  tax 
the  duties  on  leather  and  candles  did  not  long  remain.  In 
1830-1  they  were  repealed.  The  impost  on  soap — that 
*  tax  on  cleanliness ' — survived  till  Mr.  Gladstone's  first 
Budget  in  1853.  Glass  was  released  in  1845,  but  paper 
continued  liable  to  duty  till  1861.  Starch  and  bottles  were 
exempted  in  1834,  bricks  and  tiles  in  1850.  These  repeals 
of  duty,  which  seem  so  trifling,  were  really,  taken  together, 
a  considerable  boon  to  British  industry  and  to  the  bulk  of 
consumers.  The  progress  of  the  chemical  industries  may 
be  dated  from  the  repeal  of  the  salt  duty.  Bricks,  tiles, 
and  glass  are  constituents  of  that  most  necessary  com- 
modity— a  house,  besides  being  of  use  in  numberless  other 
ways.  The  paper  tax  was  even  more  than  a  '  tax  on 
knowledge ' ;  it  hindered  the  development  of  an  important 
industry  and  raised  the  price  of  an  article  capable  of  many 
different  uses.  These  advantages  were  well  worth  the  sacri- 
fice of  the  revenue  obtained  from  the  abandoned  duties  1. 

The  treatment  of  alcoholic  drinks  stands  apart  from  the 

1  The  following  were  the  amounts  yielded  by  the  excise  taxes  on  the  above- 
mentioned  articles  at  the  dates  of  abolition  : — 

£ 

Salt  (1825)  .  .  .  380,000 

Leather  (1830)  .  .  .  360,000 

Candles  (1831)  .  .  .  476,500 

Starch  (1834)  .  .  .  90,000 

Bottles  (1834)  .  .  .  3,600 

Glass  (1845)  .  .  .  600,000 

Bricks  (1850)  .  .  .  456,000 

Soap  (1853)  .  .  .  1,126,000 

Paper  (1861)  .  .  .  1,350,000 

Total         4,842,100 


CHAP.  VI.]         INTERNAL   TAXES   ON   COMMODITIES.  461 

general  system  pursued  with  respect  to  industries.  In  their 
case  there  has  been  no  remission,  except  when  there  was  a 
prospect  of  increasing  productiveness.  The  only  exception 
to  this  rule — the  repeal  of  the  beer  duty  in  1830,  by  which 
£3,100,000  of  revenue  was  sacrificed — had  in  part  the  aim 
of  making  the  malt  tax  more  productive,  and  this  was  in 
good  degree  attained.  Besides  the  double  system  of  taxing 
both  malt  and  beer  was  recognised  as  inconvenient.  During 
the  half  century  1830-80  the  malt  tax  was  the  mode  in 
which  beer  and  ale  were  taxed,  and  supplied  a  standing 
grievance  to  agriculturists.  Its  large  yield — £8,000,000  in 
1877 — made  it  impossible  to  repeal  it,  but  in  1880  the  exist- 
ing duty  on  beer  was  imposed  in  its  place,  partly  to  relieve 
the  depressed  farmers,  but  also  in  accordance  with  the  prin- 
ciple that  a  tax  should  be  as  near  the  point  of  consumption 
as  can  be  arranged,  in  order  that  the  preliminary  processes 
may  be  released  from  excise  restraints.  The  returns  from 
the  beer  duty  for  the  ten  years  1881-90  have  quite  realized 
expectations.  For  1889-90  the  amount  was  £9.400,000. 

The  duty  on  hops,  first  imposed  in  1710,  became  later  on 
a  subsidiary  duty  to  the  main  tax  on  beer.  It  had  the 
grave  defects  of  being  uncertain  in  its  yield  and  pressing  on 
the  raw  material,  which  was  moreover  an  agricultural  pro- 
duct Accordingly  this  tax  was  repealed  in  1862,  leaving 
nothing  of  the  kind,  except  the  trifling  duty  on  chicory,  in 
the  English  excise.  Its  yield  had  varied  from  £86,000  in 
1852  to  £728,000  in  1855. 

British  spirits  have  presented  greater  difficulties.  If  the 
principle  of  fixing  the  duty  in  proportion  to  the  amount  of 
alcohol  contained  be  adopted,  the  rate  on  spirits  should 
much  exceed  that  on  beer,  and  the  aim  of  encouraging 
temperance  would  lead  to  the  same  result.  On  the  other 
hand  the  principal  seats  of  production  of  spirits  are  in  Ire- 
land and  Scotland,  and  the  average  consumption  in  their 
case  is  also  greater.  Heavy  taxation  of  the  more  alcoholic 
drinks  therefore  presses  unfairly  on  those  parts  of  the 
United  Kingdom.  Finally,  the  enforcement  of  the  revenue 


462  PUBLIC   FINANCE.  [BOOK  IV. 

laws  is  no  easy  matter  in  wild  and  mountainous  districts, 
and  consequently  the  limit  of  productivity  was  at  first  rather 
low.  Existing  methods  are  the  outcome  of  the  efforts  to 
meet  these  several  obstacles. 

The  scale  of  duty,  previously  fixed  on  different  principles 
in  the  three  countries,  was  unified  by  Robinson  (1825),  the 
only  difference  being  the  higher  rate  in  England-  (7^.  per 
gallon).  By  a  series  of  measures  the  Scotch  and  Irish 
duties  were  brought  up  to  the  level  of  the  English  one, 
itself  raised  by  degrees,  until  in  1858  a  uniform  duty  of 
8j.  per  gallon  was  imposed.  The  increase  in  return  was 
considerable.  In  1829  the  yield  had  been  £4,800,000  ;  by 
1851  it  was  over  £6,000,000.  For  1859  the  amount  re- 
ceived was  a  little  under  £9,000.000.  An  increase  to  loj. 
per  gallon  in  1860  made  the  tax  still  more  productive,  till 
in  1868  it  was  £10,500,000.  The  great  prosperity  of  trade 
and  the  more  efficient  excise  administration  caused  large 
annual  increases,  until  in  1875-6  the  highest  return — 
— £15,150,000 — was  obtained.  From  that  date  there  was 
a  decline  for  several  years,  but  the  yield  is  again  elastic, 
and  a  new  maximum  was  reached  in  1890-1,  when  the 
receipts  from  this  source  were  £15,475,000. 

It  is  therefore  apparent  that  the  excise  system  of 
England,  so  far  as  it  applies  to  commodities,  is  almost 
exclusively  a  tax  on  alcoholic  drinks,  and  is  carried  out  by 
supervision  of  the  brewing  and  distilling  industries,  which 
involves  a  very  complete  control  of  their  operations.  The 
modern  tendency  to  concentrate  the  production  of  both 
beers  and  spirits  at  a  fewr  centres  makes  this  system  less 
troublesome,  and  the  heavy  taxation  in  turn  favours  the 
larger  producers.  Further  steps  in  this  direction  have  been 
taken  in  the  last  few  years  by  the  extensive  creation  of 
limited  companies,  who  almost  possess  a  monopoly  of 
special  forms  of  beer,  ale,  or  whisky,  and  who  therefore 
bear  the  first  weight  of  increased  taxation.  The  whole  situa- 
tion is  a  highly  artificial  one ;  by  it  the  State  draws  very 
large  resources  from  the  taxation  of  what  is  an  instrument 


CHAP.  VI.]         INTERNAL   TAXES   ON   COMMODITIES.  463 

of  luxury,  in  many  cases  one  of  vice.  The  aim  of  reducing 
the  national  consumption  of  these  drinks  is  naturally  post- 
poned to  that  of  maintaining  so  material  a  support  of  the 
public  revenue,  and  the  problem  of  adjusting  the  duties 
between  the  different  classes  is  very  imperfectly  dealt  with. 
There  may  be  some  reason  for  favouring  such  beverages  as 
are  believed  to  possess  some  nutritive  power  and  to  be  less 
likely  to  cause  intoxication  ;  but  the  present  scales  of  duty 
seem  unfair  as  between  the  consumers  of  spirits  and  those 
of  beer. 

The  trade  licenses  which  accompany  and  are  officially 
regarded  as  a  part  of  the  excise  have  been  already  dis- 
cussed \ 

From  one  point  of  view  the  internal  tax  system  also 
deals  with  the  important  article  of  tobacco  ;  but  until 
within  the  last  few  years  it  has  been  confined  to  the  nega- 
tive function  of  preventing  its  cultivation  in  the  United 
Kingdom.  This  system  of  prohibition,  which  seems  to  be 
a  direct  violation  of  industrial  liberty  and  an  interference 
with  a  probably  gainful  employment,  dates  in  England 
from  the  time  of  Charles  II2,  and  has  been  justified  on 
the  grounds  of  the  inferiority  of  the  home-grown  plant  and 
the  great  trouble  of  collecting  a  very  high  duty  on  an 
article  of  local  production.  At  present  licenses  are  granted 
for  the  purpose  of  experimental  growing,  though  there  is 
little  probability  of  the  cultivation  extending. 

The  processes  of  the  English  taxation  of  commodities 
are  reduced  almost  entirely  to  levies  on  the  producers  of 
the  taxed  articles,  the  sale  licenses  being  rather  charges  on 
the  profits  of  the  occupations,  which,  however,  does  not 
prevent  their  being  useful  as  adjuncts  of  the  excise  by 
bringing  all  producers  and  dealers  under  the  notice  of  the 
authorities,  and  facilitating  supervision.  Duties  purely  on 
sale  are  not  employed,  though  the  bonding  system,  by 

1  Bk.  iv.  ch.  2.  §  8. 

2  The  prohibition  at  first  applied  to  Ireland,  but  was  removed  in  1779  in 
consequence  of  the  American  war.     It  was  reimposed  in  1832. 


464  PUBLIC   FINANCE.  [BOOK  IV. 

which  goods  are  retained  under  official  control  free  of  duty 
until  withdrawn  for  use,  nearly  approximates  to  that 
form.  Neither  are  duties  on  the  land  under  cultivation  for 
a  crop  of  the  taxed  article  in  use.  Finally  the  monopoly 
system  is  not  a  part  of  English  policy.  Spirits,  beer,  and 
tobacco  would  be  the  only  objects  for  its  operation,  and 
each  of  them  is  treated  in  another  way.  In  fact  the  great 
characteristic  of  this  form  of  British  taxation  is  the  sim- 
plicity alike  of  its  objects  and  its  processes. 

§  6.  The  French  methods  are  much  more  elaborate, 
and  possess  a  longer  history.  Under  the  Ancien  Regime 
indirect  taxation  had  been  extensively  employed.  The 
necessities  of  the  State  had  led  to  the  heavy  and  unequal 
salt  tax,  to  the  duties  on  drinks,  on  leather,  iron,  and  other 
useful  articles,  to  the  monopoly  of  tobacco,  and  the  costly 
and  vexatious  inter-provincial  duties.  The  origin  of  the 
system  may  be  traced  to  the  fifteenth  century,  in  which  the 
monarchy  was  reconstructed  after  the  English  wars.  A 
great  expansion,  however,  took  place  in  the  seventeenth 
century,  when  the  administration  of  Colbert  had  recast  the 
financial  system,  and  when  such  a  new  source  of  revenue  as 
tobacco  was  secured. 

The  continuous  development,  apparently  broken  by  the 
Revolution,  soon  returned  to  its  old  course,  though  purged 
of  many  of  the  defects  that  had  previously  existed.  The 
vices  of  pre-revolutionary  taxation  arose  rather  from  defec- 
tive administration  than  from  the  inherent  badness  of  the 
articles  selected  for  duty.  There  were  innumerable  personal 
and  local  discriminations  ;  the  noblesse  were  exempt  from 
various  charges,  and  some  districts  were  free  from  duties 
that  pressed  heavily  on  others.  Thus  salt  was  under  six 
different  systems,  according  to  the  particular  province,  not 
to  speak  of  the  many  local  privileges.  Similar  complexities 
were  connected  with  the  duties  on  wines  and  brandies.  But 
far  greater  was  the  evil  of  the  mode  of  collection,  which 
was  by  the  system  of  farming  or  letting  out  to  companies, 
who  contracted  to  pay  a  certain  sum  in  return  for  the  col- 


CHAP.  VI.]         INTERNAL   TAXES   ON    COMMODITIES.  465 

lection  of  the  duties.  This  system,  so  characteristic  of 
Roman  Finance,  recurs  in  the  French  indirect  taxes,  and 
did  much  to  increase  their  unpopularity.  The  '  Farmers 
General '  were  objects  of  universal  dislike,  and  some  of 
the  members  of  the  body  paid  the  penalty  during  the 
Revolution  l. 

One  of  the  first  results  of  the  disturbances  that  broke 
out  in  1789  was  a  check  to  the  collection  of  the  indirect 
taxes.  The  offices  for  the  duties  on  salt,  on  wines  and 
spirits,  and  also  the  internal  customs  were  attacked.  Con- 
traband salt  and  tobacco  were  freely  sold,  and  the  toll- 
barriers  of  the  cities  were  thrown  down  2.  The  failure  to 
collect  the  faille  was  more  than  paralleled  by  the  case  of  the 
indirect  taxes.  This  strong  popular  sentiment  undoubtedly 
encouraged  the  Constituent  Assembly,  already  imbued  with 
the  physiocratic  dislike  to  taxes  on  consumption,  to  take 
the  somewhat  rash  course  of  abandoning  the  greater  part 
of  the  obnoxious  duties. 

After  an  ineffectual  attempt  to  maintain  it  provisionally 
the  salt  tax  was  abolished  in  March  1790.  In  1791  the 
aides,  or  drink  duties,  met  the  same  fate,  as  did  also  the 
tobacco  monopoly.  The  abolition  of  the  octrois  was  decreed 
in  Februry  1791. 

So  complete  a  break  with  past  financial  conditions  could 
not  continue  3,  and  accordingly  we  find  that  the  work  of  the 
next  ten  or  fifteen  years  consisted  in  building  up  the  struc- 
ture on  the  same  general  lines,  but  without  the  serious 
faults  that  it  had  previously  contained.  The  salt  tax  was 
restored  in  1806,  but  the  old  inequalities  and  the  system  of 
monopoly  were  not  brought  back.  The  suitability  of 
tobacco  as  an  object  of  heavy  taxation  made  it  advisable, 

1  Lavoisier,  the  eminent  chemist,  was  one  of  the  sufferers.     For  the  system  of 
the  Ancien  Regime,  see  Stourm,  chs.   11-14.      For   the   mechanism   of  the 
Finances,  cp.  Bk.  vi.  ch.  2,  and  the  Dictionnaire  de  r£conomie  Politique,  s.  v. 
'  Finances  de  1'Ancien  Regime/     For  the  earlier  history,  Clamageran,  Histoirt 
de  VImpdt. 

2  Stourm,  i.  295. 

3  Introd.  Part  i.  §  8. 

H  h 


466  PUBLIC    FINANCE.  [BOOK  IV. 

after  a  series  of  ineffective  attempts  at  taxation  in  the 
ordinary  way,  to  re-establish  the  State  monopoly  of  that 
article  in  1810.  The  octrois  were  gradually  re-introduced, 
beginning  with  that  of  Paris  in  1798,  and  soon  extending 
to  other  towns.  Finally  the  complete  freedom  of  spirituous 
liquors  from  taxation  was  put  an  end  to  by  the  law  of  1 804, 
which  imposed  a  tax  on  wine  and  cider  when  in  the  pos- 
session of  the  producer.  Further  taxation  of  this  promising 
source  speedily  followed  in  the  duties  on  the  transport  of 
drinks,  and  the  tax  on  the  amount  sold  by  dealers.  Thus 
in  less  than  twenty  years  the  system  apparently  overthrown 
at  the  Revolution  was  again  in  force,  freed  from  its  most 
objectionable  features. 

§  7.  The  existing  French  system,  which  in  its  main  out- 
lines was  established  at  the  fall  of  the  first  Empire,  shows 
when  compared  with  that  of  England,  a  number  of  sug- 
gestive resemblances  and  equally  suggestive  differences. 
There  is  the  same  broad  general  treatment  as  respects  the 
commodities  selected  for  taxation  and  the  proportionate 
burden  placed  on  each  class  ;  there  is  also  the  same  readi- 
ness to  levy  the  duty  at  the  most  favourable  point,  and 
lastly  there  is  the  same  prominence  given  to  this  kind  of 
indirect  taxation  in  the  fiscal  system.  On  the  other  hand 
the  French  system  has  a  wider  basis.  Salt,  so  neces- 
sary both  for  domestic  and  industrial  uses,  is  an  object 
of  charge.  So  is  that  very  general  article  o£  consumption, 
sugar,  whose  treatment  has  so  often  harassed  financiers,  and 
which  when  freed  from  duty  has  grown  so  much  in  favour 
in  the  United  Kingdom.  The  paper  tax  has  only  been 
suppressed  in  the  last  five  years,  while  matches,  whose 
taxation  in  England  Mr.  Lowe  could  not  propose  with- 
out losing  whatever  financial  popularity  he  had  possessed — 
are  placed  under  a  state  monopoly,  as  is  also  gunpowder, 
while  dynamite  is  taxed.  Oil  is  another  important 
commodity  that  has  to  suffer  taxation,  to  which  may  be 
added  candles.  Acid  and  vinegar  may  close  the  list, 
which  establishes  that  France  possesses  that  diversity  of 


CHAP.  VI.]         INTERNAL  TAXES   ON   COMMODITIES.  467 

indirect  taxes,  which  McCulloch  believed  to  have  been  too 
hastily  abandoned  in  England  l. 

Again,  the  procedure  of  the  French  administration  is 
much  more  varied.  The  drink  duties  are  levied  partly  on 
wine  in  circulation,  partly  on  the  retailers  who  sell  it,  partly 
on  its  entry  into  towns.  Beer  and  spirits  are  taxed  at  the 
point  of  manufacture,  in  fact  on  the  system  of  the  English 
excise.  Salt  and  sugar  are  similarly  dealt  with,  but  in  all 
these  cases  the  duty  on  transport  may  come  into  operation. 

A  more  remarkable  feature  is  the  use  of  monopoly  as  a 
fiscal  agent.  It  is  true  that  in  England  the  Post  Office  is 
under  this  regime,  but  ordinary  commodities  are  quite  free 
from  it.  In  France,  besides  the  small  monopolies  of  gun- 
powder and  matches — the  latter  created  in  1872,  and  con- 
ceded to  a  company,  but  taken  up  by  the  State  in  1890— 
there  is  the  great  tobacco  manufacture,  which  is  altogether 
a  State  concern.  Experience  has  shown  that  only  by  this 
means  could  sufficient  revenue  be  obtained  from  it. 

These  contrasts  are  to  some  extent  due  to  the  more 
rigorous  administrative  system  of  continental  countries. 
Interference  with  internal  trade  would  be  much  more  diffi- 
cult, and  cause  more  irritation  in  England.  But  the  different 
position  of  the  two  countries  is  a  far  more  powerful  cause. 
It  is  comparatively  easy  to  watch  the  manufacture  of  drinks 
in  the  United  Kingdom  owing  to  the  concentration  of  the 
industry.  The  problem  of  supervising  the  vineyards  of  the 
French  peasantry  has  proved  too  difficult  for  the  revenue 
officials  of  that  country,and  led  to  the  repeal  of  the  inventory 
duty  of  1804.  The  insular  position  of  Great  Britain  has 
been  a  further  assistance  in  protecting  her  excise  system 
from  the  introduction  of  contraband  goods.  Thus  the  price 
of  the  State  manufactured  tobacco  in  France  has  to  be 
varied  according  to  the  proximity  of  the  district  to  the 
frontier.  The  methods  of  each  country  are  in  fact  adapted 
to  meet  the  circumstances  peculiar  to  its  situation. 

At  the  same  time  it  must  be  said  that  in  certain  respects 

1   Taxation  and  Funding,  231. 
H  h  2 


468  PUBLIC    FINANCE.  [BOOK  IV. 

French  taxation  of  home  commodities  falls  short  of  the 
highest  attainable  standard.  Some  of  the  duties  are  of 
too  small  a  yield  to  justify  their  retention.  The  salt  tax, 
even  though  it  is  confined  to  that  used  for  domestic  con- 
sumption, is  too  irksome  and  unequal  a  charge  to  be  main- 
tained when  its  return  is  only  ;£  1,250,000.  The  taxes  on 
oils,  matches,  candles,  and  explosives  might  also  be  re- 
moved. The  sugar  duty  is  a  more  doubtful  case.  Its 
yield  is  very  considerable — ^"6.300,000  in  1890 — and  with  the 
heavy  burdens  that  the  country  has  to  meet  such  a  resource 
should  not  be  lightly  given  up.  Unfortunately  the  duty  on 
sugar  has  become  mixed  up  with  the  pernicious  bounty 
system,  which  is  evil  alike  for  the  treasury  and  the  pro- 
ducers. Moreover,  the  technical  problems  connected  with 
the  measuring  of  the  quantity  and  quality  of  sugar  yielded 
are  very  difficult,  so  much  so  that  they  were  some  of 
the  reasons  for  the  repeal  of  the  duty  in  England.  A 
uniform  duty  on  the  finished  product,  adjusted  to  equal  the 
import  duty  on  the  article,  seems  at  present  the  best  course. 
It  would  get  rid  of  the  bounty  trouble  and  would  not  leave 
much  opening  for  fraud. 

The  wine  and  spirit  duties  are  an  indispensable  part  of 
the  system,  and  should  be  very  cautiously  treated.  The 
exemption  of  wine  consumed  by  the  grower  is  a  gap  in  the 
tax,  that  at  once  reduces  the  receipts  and. makes  its  inci- 
dence unfair.  Nothing  but  the  hopelessness  of  levying  the 
duty  could  excuse  this  omission.  A  system  of  licenses  for 
private  consumption,  such  as  that  adopted  for  private  brew- 
ing in  England,  might  in  some  degree  remedy  the  grievance. 
A  further  cause  of  complaint  has  been  found  in  the  com- 
paratively high  duty  on  retail  sales.  The  artisan  who  buys 
his  wine  in  small  quantities  is  more  severely  taxed  than 
the  large  consumer,  who  has  only  the  moderate  duty  on 
transport  to  pay.  The  impossibility  of  raising  the  latter 
tax  without  provoking  an  extensive  contraband  trade,  and 
the  loss  that  any  lowering  of  the  duty  on  retailers  would 
cause  are  the  hindrances  to  reform.  The  duty  levied  on 


CHAP.  VI.]         INTERNAL   TAXES   ON    COMMODITIES.  469 

the  entry  of  wine  into  towns  with  more  than  4000  inhabi- 
tants is  a  further  pressure  on  the  residents  in  them,  though 
its  consolidation  with,  or  perhaps  more  accurately  speaking 
replacement  of,  the  duty  on  retailers,  where  the  popula- 
tion exceeds  10,000,  carried  out  in  1875,  is  on  the  whole  a 
desirable  measure.  The  attempt  to  exercise  surveillance 
over  the  very  large  number  of  agricultural  distillers  has 
proved  a  failure,  compelling  resort  to  the  tax  on  circulation 
of  spirits.  These  difficulties — which  are  good  examples  of 
the  inevitable  dilemmas  that  indirect  taxation  gives  rise  to 
— are  due  in  a  great  measure  to  the  position  of  France  as  a 
wine-producing  country.  Taxation  of  the  cheaper  wines 
falls  necessarily  on  the  bulk  of  the  population,  as  it  is 
imposed  on  their  usual  consumption.  The  cry  of  a  '  free 
breakfast  table,'  once  so  popular  in  England,  would  need 
for  its  realization  in  France  the  removal  of  the  wine  duty. 
It  is  highly  probable  that  the  bulk  of  the  drink  duties 
will  be  more  and  more  shifted  to  alcohol,  and  thus  let  the 
lighter  wines  escape  easily. 

Notwithstanding  these  grievances  and  gaps  in  the  French 
system,  it  must  be  pronounced  to  be,  on  the  whole,  and  con- 
sidering the  problems  to  be  dealt  with,  a  skilful  application 
of  well-planned  administrative  principles.  Tried  by  the 
great  test  of  productiveness,  it  answers  the  object  for 
which  it  was  planned.  The  various  indirect  contributions 
bring  in  close  on  £26.000,000,  of  which  the  drink  duties 
provide  about  £18,000,000,  and  the  internal  sugar  duty 
£3,400,006.  The  monopolies  gain  about  £16,000,000 
(95  Per  cent,  of  which  comes  from  tobacco).  When  the 
total  is  taken  it  comes  to  the  great  amount  of  £42,000,000. 
Of  this  great  revenue,  spirits,  beers  and  wines,  tobacco, 
and  sugar  are  the  principal  sources,  the  other  duties  form- 
ing but  a  trifling  supplement.  As  in  England,  these  articles 
are  the  support  of  the  exchequer,  while  in  France  the  drink 
duties  further  contribute  about  £4,000,000  annually  to 
local  Finance1. 

1  See  §  13  infra. 


470  PUBLIC    FINANCE.  [BOOK  IV. 

§  8.  Italian  Finance  has  not  had  the  same  opportunities 
for  the  development  of  a  productive  system  of  indirect 
taxation  as  those  possessed  by  England  and  France.  The 
poverty  of  the  people  and  the  short  duration  of  the  present 
Kingdom  have  both  prevented  the  creation  of  a  complete 
system.  Nevertheless  the  eminent  statesmen  and  econo- 
mists to  whom  the  conduct  of  affairs  has  been  entrusted 
have  made  great  progress  in  this  direction,  and  have  en- 
deavoured to  apply  scientific  principles,  so  far  as  the 
difficulties  of  the  situation  would  allow. 

The  tax  system  of  Italy  had  to  be  built  up  on  that  of  the 
several  states  out  of  which  it  was  formed,  and  it  had  to 
supply  sufficient  funds  to  meet  the  growing  expenses  of  the 
new  Government.  These  conditions  made  the  adoption  of 
taxes,  in  other  respects  very  undesirable,  a  necessity.  The 
grist  tax  which  fell  on  the  main  items  of  subsistence  was 
at  once  oppressive  and  unequal,  but  it  became  one  of 
the  sources  of  revenue  from  1869  to  1882,  bringing  in 
83,500,000  lire  (£3,340,000)  in  1878,  and  an  average  of  over 
£2,700,000  for  each  year  of  its  continuance.  Salt — another 
necessary — has  been  kept  under  a  state  monopoly,  as  it  was 
in  most  of  the  smaller  Italian  states.  Spirits,  beers,  and 
mineral  waters  have  also  been  placed  under  an  excise ;  so 
have  cotton  oil,  chicory,  gunpowder,  and  the  more  important 
article  of  sugar.  A  monopoly  of  tobacco  has  been  con- 
ceded to  a  company,  and  the  return  from  this  source  is  one 
of  the  large  items  in  the  budget  (over  £7,500,000). 

Italy,  however,  differs  from  both  England  and  France  in 
making  use  of  the  town  duties  on  goods  as  a  source  of 
State  revenue.  The  Italian  octroi  duties  are  notorious  for 
their  severity,  falling  as  they  do  on  articles  of  necessary 
consumption,  as  well  as  on  the  commoner  enjoyments. 
Flour,  rice,  meat,  butter,  sugar,  wine,  beer  and  spirits, 
are  all  subjected  to  these  local  customs  for  the  benefit  of 
the  State,  with  additional  charges  for  municipal  purposes. 
The  inconvenience  of  this  method  is  indisputable  :  it  causes 
local  variations  in  taxation  levied  for  common  purposes, 


CHAP.  VI.]         INTERNAL   TAXES   ON   COMMODITIES.  471 

and  it  is  besides  open  to  the  general  objections  to  the  octroi 
system.  The  tax  on  wine  may  be  defended  on  the  same 
ground  as  the  French  entry  duty,  viz.  that  it  is  the  only 
possible  way  of  reaching  an  article  of  such  general  produc- 
tion and  consumption,  but  this  very  difficulty  seems  to 
point  to  some  other  form  of  taxation  as  the  most  desirable 
solution.  The  total  yield  of  £3,200,000  from  octrois  for 
State  purposes  is  not  large  enough  to  justify  the  employ- 
ment of  so  unfair  and  unpopular  a  method  of  taxation. 

In  extenuation  of  these  seemingly  oppressive  and  burden- 
some taxes  it  is  necessary  to  remember  the  smaller  amount 
of  the  national  wealth  x  and  the  impossibility  of  limiting 
taxes  to  such  articles  of  superfluous,  or  at  best  convenient, 
expenditure  as  alone  are  dutiable  in  England.  Where  good 
objects  of  taxation  are  wanting,  the  financier  must  perforce 
adopt  those  that  are  indifferent  or  bad.  The  direct  taxa- 
tion of  the  country  is  also  heavy,  and  therefore  the  question 
of  fiscal  reform  is  primarily  one  of  expenditure.  Curtail- 
ment in  the  military  and  naval  outlay  and  in  the  cost  of 
administration  would  allow  at  least  the  removal  of  the 
octrois,  combined  with  a  reform  of  the  tax  on  movable 
wealth,  that  would  be  a  great  relief  to  trade  and  secure  a 
fairer  distribution  of  the  total  load.  A  judicious  reform  of 
the  drink  duties  might  even  raise  their  productiveness  with- 
out injury  in  other  respects.  The  whole  position  of  Italian 
indirect  taxation  is  a  useful  illustration  of  the  modifications 
necessary  in  applying  general  principles  to  the  economic 
system  of  a  people  at  a  somewhat  low  stage  of  industrial 
development.  Such  taxes  as  the  grist  tax  or  the  existing 
salt  monopoly  would  be  unhesitatingly  condemned  on 
a  priori  grounds,  but  they  were  required  in  the  particular 
situation. 

The  relation  of  indirect  taxation  to  the  consumption  of 
the  people  is  here  shown  afresh.  It  is  not  possible  to  gain 

1  The  wealth  of  Italy  has  been  estimated  at  £2, 120  000,000,  or  one-fifth  that 
of  England.  Pantaleoni,  Giornale  degli  Economist '/,  Aug.  1890,  139  sq.  Cp. 
Giffen,  Growth  of  Capital,  153. 


472  PUBLIC   FINANCE.  [BOOK  IV. 

large  returns  from  a  southern  people  through  the  duties  on 
the  stronger  alcoholic  liquors.  Such  taxation  as  that  of 
England  would  check  the  use  of  spirits  completely.  The 
same  statement  would  hold  true  of  any  particular  article. 
The  theoretical  doctrine  that  the  minimum  of  subsistence 
(  should  be  exempt  from  taxation,  however  well  it  may 
sound,  can  only  be  applied  in  a  society  that  has  a  consider- 
able disposable  surplus.  When  dealing  with  such  popula- 
tions as  those  of  Italy  or  India,  taxation  must,  to  be  effective, 
fall  on  objects  that  constitute  a  part  of  necessary  consump- 
tion. 

§  9.  The  system  of  excises  had  a  comparatively  early 
and  wide  application  in  Germany.  Without  entering  closely 
into  the  details  it  suffices  to  indicate  the  general  fact. 
That  the  German  cities  should  adopt  a  system  of  the  kind 
was  quite  natural  ;  it  was  merely  an  octroi  applied  by  a 
virtually  sovereign  state,  but  it  seems  that  the  method  was 
imitated  by  the  various  princes,  and  notably  in  Branden- 
burg, where  'the  general  excise  '  was  introduced  in  1640  for 
some  towns  and  gradually  extended.  This  tax,  which  was 
limited  to  the  towns,  affected  corn,  meat,  drinks,  raw 
materials,  and  imported  goods.  It  was  intended  to  fall  on 
the  country  through  the  process  of  shifting,  .and  was  un- 
doubtedly one  of  the  principal  sources  of  revenue.  The 
re-construction  of  the  Prussian  Finances  after  the  French 
wars  resulted  in  the  substitution  of  the  '  meal  and  meat ' 
tax  (1820),  which  was  imposed  only  on  the  towns,  as  a 
kind  of  compensation  for  the  '  class  tax ' *  that  affected  the 
country  districts.  The  yield  of  these  taxes,  which  were 
given  up  in  1873,  was  about  ^"400,000. 

Other  taxes,  more  in  accordance  with  modern  practice, 
were  added.  Breweries  and  distilleries  came  under  excise 
supervision,  and  a  moderate  tax  on  the  production  of  wine 
was  imposed.  The  beet-root  sugar  was  placed  under  duty 
in  1 840,  the  old  salt  monopoly  was  retained,  and  tobacco 

1  Cp.  Bk.  iv.  ch.  3.  §  2  for  the  '  class  tax.' 


CHAP.  VI.]         INTERNAL   TAXES   ON    COMMODITIES.  473 

was  made  to  contribute  through  a  tax  on  the  land  given 
up  to  its  cultivation. 

The  chief  interest  of  this  part  of  Prussian  Finance  lies  in 
the  fact  that  it  has  furnished  the  basis  for  the  system  of 
the  present  German  Empire.  Its  development  had  in  turn 
been  influenced  by  the  need  of  adjusting  internal  taxa- 
tion to  suit  the  regulations  of  the  Zollverein  as,  e.g.  in 
the  cases  of  the  sugar  and  tobacco  duties.  The  advances  in 
technical  precision  and  productiveness  since  the  formation 
of  the  Empire  have  not  been  as  great  as  might  have  been 
expected.  The  salt  monopoly  was  changed  in  1867  into  a 
tax  on  the  article,  which  has  been  retained  up  to  the  present. 
The  other  objects  of  taxation  are,  it  must  be  said,  treated 
in  an  unsatisfactory  way.  Thq  sugar  duty  which  ought  to 
be  fairly  productive  is  destroyed  by  the  bounty  system 
which  has  absorbed  the  greater  part  of  the  receipts  \  Even 
when  this  difficulty  has  been  removed — as  it  will  be  by  the 
recent  legislation  on  the  subject — the  yield  of  the  tax  will 
not  be  large,  as  the  produce  of  the  industry  is  mainly 
exported,  and  heavy  taxation  would  be  injurious  to  its 
development.  The  tobacco  tax  is  suffering  in  a  different 
way.  At  present  it  is  levied  through  the  inefficient  excise 
system,  and  its  amount  is  consequently  low,  10,021,000 
marks  (^"500,000).  The  remedy  proposed  in  1885  was  the 
establishment  of  a  monopoly,  on  the  same  system  as  that 
existing  in  France,  Italy,  and  Austria,  but  it  was  defeated 
and  no  further  reform  has  been  carried  out.  A  like  attempt 
which  was  made  with  regard  to  the  refining  of  spirits  met 
with  the  same  fate.  However,  the  rate  of  duty  has  been 
increased  considerably  in  the  latter  case  with  very  bene- 
ficial results  to  the  revenue,  the  receipts  for  the  year 
1889-90  being  estimated  at  ^"6,750,000.  Beer  is  also  a 
source  of  revenue,  but  to  a  much  smaller  amount,  owing  to 
the  lower  rate,  and  the  collection  of  the  duties  by  the  state 
governments  of  Bavaria,  Wiirtemberg,  and  Baden,  which 
reduces  the  receipts  of  the  Empire. 

1  114,000,000  marks  out  of  141,000,000  marks  in  1886-7,  Cohn,  §  413. 


474  PUBLIC    FINANCE.  [BOOK  IV. 

German  internal  taxation  is  in  some  respects  unfortun- 
ately placed.  The  separate  interests  of  the  different 
states  hinder  the  most  effective  forms  of  duty  being  im- 
posed, but  still  more  the  articles  to  be  taxed  are  specially 
important  products.  Spirits,  beer,  and  sugar,  are  all  ex- 
ported, and  engage  a  good  deal  of  the  national  capital 
and  labour.  Taxation  is,  therefore,  more  keenly  felt,  and 
strict  supervision  by  the  revenue  officials  is  more  injurious. 
The  treatment  of  agricultural  distilling  is  a  particularly 
difficult  matter,  and  one  that  only  admits  of  a  compromise. 
Fiscal  presumptions,  whose  operation  we  have  already 
noticed  l,  are  employed  to  escape  the  cost  and  trouble  of 
more  exact  determination. 

The  economic  and  social  conditions  have,  therefore, 
prevented  as  great  a  development  of  the  modern  excise 
system  in  Germany  as  has  taken  place  in  France  :  the 
duties  are  less  productive — the  total  amount  from  -the 
this  source  for  1889-90  was  only  £12,800,000 — and  they 
are  deficient  in  just  those  articles  that  form  the  mainstay 
of  British  and  French  Finance.  Tobacco  and  alcoholic 
drinks  do  not  pay  what  might  be  expected  from  them  ; 
while  the  sugar  duty  is  far  under  its  real  productiveness  in 
consequence  of  the  expenditure  on  bounties.  The  removal 
of  this  difficulty  will  be  one  addition  to  the  receipts,  and 
may  be  taken  at  £5,000,000,  though  production  may  fall 
off  somewhat  under  the  new  regulations.  An  increased  yield 
from  tobacco,  the  end  most  needing  to  be  accomplished  at 
present,  is  to  be  reached — as  a  monopoly  seems  impracticable 
— by  a  more  effective  excise  supervision.  Beer  might  also  be 
made  to  provide  a  larger  revenue  than  it  does  at  present. 
But  even  if  these  reforms  were  realized  it  is  not  to  be  ex- 
pected that  the  revenue  could  equal  that  of  more  favourably 
situated  countries.  A  large  revenue  from  taxation  of  com- 
modities implies  either  extreme  rigour  in  the  tax  system 
or  a  high  standard  of  comfort  in  the  bulk  of  the  population. 
Revenue  may  be  wrung  out  of  the  subsistence  fund  of  the 

1  Bk.  iv.  ch.  2.  §  7. 


CHAP.  VI.]         INTERNAL   TAXES   ON   COMMODITIES.  475 

nation,  or  it  may  be  obtained  from  its  comforts  and 
luxuries.  Neither  condition  is  found  in  Germany,  and 
consequently  the  returns  of  the  indirect  taxes  are  com- 
paratively small. 

§  10.  The  tax  systems  of  other  countries  repeat  with 
modifications  and  new  combinations  the  phenomena  already 
described.  Austria  and  Hungary  derive  a  good  part  of 
their  revenues  from  this  source  Salt  and  tobacco  are 
monopolized  by  the  State  in  both  countries,  and  are  im- 
portant contributories,  the  net  return  in  Austria  being 
close  on  ,£7,000,000,  in  Hungary  about  £3,700,000.  The 
drink  duties,  including  spirits,  beer,  and  wine,  give 
£6,000,000  in  Austria,  and  about  half  that  amount  in 
Hungary.  Sugar  is  also  taxed,  yielding  a  revenue  of 
£2,000,000  in  Austria,  and  £300,000  in  Hungary.  A 
cattle  tax  is  another  of  the  forms  adopted,  but  its  pro- 
ductiveness is  small,  being  less  than  £1,000,000  for  the 
two  kingdoms.  The  octroi  duties  in  the  larger  Austrian 
towns  are  in  part  taken  for  the  general  revenue.  In  this 
way  wine,  beer,  meat,  and  other  articles  are  made  to 
contribute. 

The  principal  duties  in  Russia  are  those  on  sugar, 
tobacco,  and  particularly  spirits.  The  first  mentioned  is 
the  smallest;  in  1888  it  came  to  £500,000.  Tobacco 
yielded  in  the  same  year  £4,200,000,  but  both  were  in- 
significant in  comparison  with  the  amount  of  £42,000,000 
obtained  from  the  taxes  on  alcohol.  This  immense  sum 
shows  how  the  existence  of  a  particular  habit  may  affect 
the  revenue  of  a  country,  and  how  it  is  possible  under  cer- 
tain conditions  to  tax  a  very  poor  population.  The  contrast 
with  the  already  noticed  cases  of  Italy  and  Germany  is 
very  remarkable. 

A  further  point  of  interest  is  the  method  employed  in 
the  collection  of  these  taxes.  Tobacco,  as  in  the  United 
States,  is  taxed  by  requiring  stamped  paper  for  its  sale. 
Sugar  and  alcohol  are  subjected  to  a  strict  supervision  at 
the  factories.  Formerly  there  were  monopolies  of  both 


476  PUBLIC    FINANCE.  [BOOK  IV. 

alcohol  and  tobacco,  and  the  former  continued  till  1862 
when  it  was  abandoned  for  the  present  system  with  satis- 
factory financial  results  in  the  increase  of  the  yield  from 
less  than  £20.000,000  in  1862  to  its  present  amount. 

Except  in  the  crisis  of  war  the  internal  taxation  of  the 
United  States  has  always  been  very  restricted.  Hamilton's 
attempt  to  tax  whisky  (1791)  had  led  to  a  rebellion,  and 
the  duty  was  given  up,  to  be  again  tried  during  the  war 
with  England  (1812-14),  and  abandoned  at  its  close.  From 
that  time  till  the  outbreak  of  the  Civil  War  (1861)  there 
were  no  duties  on  domestic  goods,  not  even  on  spirits.  The 
war  requirements  of  the  Federal  Government  compelled 
recourse  to  heavy  taxation  ;  in  addition  to  the  income  tax, 
and  the  customs,  an  extensive  system  of  internal  taxation 
was  formed.  '  Raw  cotton  was  taxed  at  the  rate  of 

2  cents  per  pound Salt  was  taxed  at  the  rate  of 

6  cents  per  ico  pounds  ;  tobacco  from  15  to  35  cents  per 
pound  ;  cigars  from  3  dollars  to  40  dollars  per  1000 ;  sugar 
from  2  to  3^  cents  per  pound.  Distilled  spirits  were  first 
taxed  in  1863  at  the  rate  of  20  cents,  per  gallon  ;  the  next 
year  60  cents  ;  then  i  dollar  50  cents  and  subsequently  2 
dollars1.'  Most  manufactured  .articles  were  also  taxed, 
sometimes  both  in  the  raw  material  and  on  the  finished 
products,  without  any  attention  to  the  conditions  of  justice 
or  productiveness.  This  very  rigorous  and  on  the  whole 
effective  application  of  taxation  did  not  long  survive  the 
close  of  the  war.  By  a  series  of  enactments  during  the 
next  five  years  all  the  duties  except  those  on  tobacco  and 
spirits  were  repealed.  The  former,  which  is  carried  out  by 
means  of  a  stamp  imposed  on  the  tobacco  as  manufactured, 
has  varied  between  £5,000,000  and  £9,000,000  during  the 
last  twenty  years 2.  The  duty  on  spirits — which  has  changed 
much  in  amount,  being  reduced  to  50  cents  in  1868,  and 
raised  to  70  cents,  and  then  to  90  cents— is  far  more  produc- 
tive. The  amount  realized  in  1883  was  over  £11,500,000. 

1  Wells  in  Cobden  Club  Essays  (2nd  Series),  479. 

2  For  the  tobacco  tax,  Olmsted  in  Quarterly  Journal  of  Economics,  v.  193  sq. 


CHAP.  VI.]          INTERNAL   TAXES   ON   COMMODITIES.  477 

Indian  experience  of  direct  taxation  of  commodities  is 
confined  to  the  case  of  salt  and  spirits.  The  former  article, 
which  next  to  land  is  the  most  important  contributory,  is 
taxed  partly  through  monopoly,  partly  by  excise.  Spirits 
are  now  being  placed  under  excise  control  at  distilleries  in 
preference  to  the  old  farming  system.  Out  of  a  total  of 
1 20,000,000  rupees,  salt  yields  two-thirds,  spirits  and  drugs 
the  remainder. 

§  11.  We  are  now  in  a  better  position  for  examining 
some  general  features  of  the  taxation  of  goods.  Certain 
points  have  been  impressed  by  repetition.  One  is  the  / 
great  prominence  of  drink  duties.  England,  France, 
Russia,  and  the  United  States,  regard  them  as  the  prin- 
cipal resource  of  the  revenue.  Improvements  in  the 
methods  of  German  taxation  will  probably  bring  about 
the  same  result  there.  This  circumstance  suggests  some 
important  considerations.  The  moral  difficulty  of  basing 
the  financial  prosperity  of  the  State  on  the  growing  con- 
sumption of  what  is  useless,  and  in  many  instances  injurious, 
will  be  more  and  more  felt  in  the  future.  The  advocates 
of  temperance  can  hardly  remain  contented  with  the  pre- 
sent state  of  things  in  which  the  revenue  from  drink  so  far 
exceeds  other  receipts.  But  the  possibility  of  sweeping 
restrictive  legislation,  extending  perhaps  to  prohibition, 
raises  the  further  question  of  the  effect  of  such  measures  on 
the  State's  income.  A  reduction  of  50  per  cent,  in  the 
duties  on  spirits  and  beer  would  mean  a  grave  deficit  in 
the  English  Budget,  hardly  to  be  replaced  by  any  readily 
available  substitutes.  A  much  higher  rate  of  income  tax 
or  a  heavy  charge  on  land  would  probably  have  to  be 
tried,  perhaps  combined  with  higher  duties  on  tea  and  fresh 
taxation  of  sugar.  The  difficulties  surrounding  any  of  these 
courses  need  not  be  dwelt  on  ;  the  limits  of  productiveness 
are  reached  sooner  in  the  case  of  other  indirect  taxes,  while 
an  extension  of  the  income  or  land  taxes  would  involve  a 
shifting  of  the  present  distribution  of  taxation  that  would 
need  the  greatest  caution  before  it  could  be  justly  applied. 


478  PUBLIC    FINANCE.  [BOOK  IV. 

Connected  in  certain  respects  with  the  drink  duties  is 
the  tobacco  tax,  which  is  so  important  a  resource  in  France 
and  Italy  and — as  a  branch  of  the  customs — in  England. 
This  impost  has  the  advantage  of  falling  on  a  luxury  and 
affording  a  means  of  taxing  the  poorer  classes  who  cannot 
well  be  made  to  contribute  directly,  but  it  is  also  open, 
though  in  a  less  degree,  to  the  danger  of  shrinkage  through 
a  change  of  habits,  and  is,  besides,  in  common  with  the 
drink  duties,  hard  to  levy  in  countries  where  the  production 
is  extensively  carried  on,  as  a  high  rate  inevitably  leads  to 
illicit  traffic. 

It  is  in  great  part  owing  to  a  recognition  of  these  com- 
plications that  the  method  of  monopoly  has  been  so  much 
employed.  To  place  the  manufacture  of  an  article  in  the 
hands  of  the  State  is  a  strong  measure,  to  be  justified  only 
by  very  cogent  reasons  ;  but  where  the  need  of  revenue  is 
great,  this  sacrifice  of  a  particular  business  to  secure  com- 
plete freedom  for  the  others  may  be  desirable.  It  cannot 
be  disposed  of  by  an  appeal  to  the  principle  of  non- 
interference as  a  rule  peremptorily  binding  on  the  State. 
The  real  point  to  be  aimed  at  is  to  secure  the  needed 
revenue  with  the  smallest  amount  of  restriction,  a  result 
perhaps  best  attained  through  monopoly.  This,  among 
other  considerations,  has  led  to  the  proposals  for  a  State 
monopoly  of  alcohol,  which  have  been  brought  forward 
both  in  Germany  and  France,  but  which  have  not  proved 
acceptable  in  either  country.  The  reasons  advanced  in 
favour  of  such  a  measure  are  weakened  by  the  great  extent 
of  the  industry  and  the  elaborate  appliances  needed  for  its 
proper  working.  That  a  State  department  could  with 
financial  profit  undertake  the  production  or  sale  of  spirits 
is  not  likely,  though  it  was  confidently  believed  that  this 
result  could  have  been  reached  in  Germany1.  So  far  as  the 
evidence  goes  a  rigid  excise  system  appears  to  be  better 
both  for  the  industry  and  the  State.  The  progress  of  in- 
vention is  certainly  retarded  by  the  routine  that  State 

1  The  Swiss  alcohol  monopoly  has  given  a  small  profit. 


CHAP.  VI.]         INTERNAL   TAXES   ON    COMMODITIES.  479 

management  sets  up,  and  therefore,  where  it  is  desirable  to 
secure  the  continual  development  of  new  processes,  pro- 
duction should  be  left  to  private  initiative,  and  as  far  as 
possible  released  from  surveillance.  But  whatever  be  the 
form  adopted,  intoxicating  drinks  and  tobacco  must  in  the 
immediate  future  be  the  principal  resource — so  far  as 
indirect  taxation  is  concerned. 

Among  the  other  dutiable  articles  sugar  holds  a  high 
place,  and  if  revenue  be  needed,  it  is  one  of  the  most 
eligible  objects  for  taxation,  much  more  so  than  a  necessary 
commodity  like  salt.  This  latter,  again,  is  a  preferable 
object  to  either  corn  or  meat.  A  fiscal  system  that  in- 
cludes all  these  duties  reaches  a  high  degree  of  harsh- 
ness, the  addition  of  duties  on  raw  materials  being  all 
that  is  necessary  to  make  it  attain  the  maximum  in  this 
respect. 

The  technical  operations  connected  with  the  levying  of 
duties  deserve  some  notice.  Modern  appliances  have  made 
it  far  easier  to  gauge  the  exact  product  in  most  taxed  in- 
dustries ;  the  strength  of  spirits  or  the  sweetness  of  sugar 
can  be  ascertained  with  great  precision  by  the  use  of  special 
instruments,  and  in  other  cases  similar  aids  are  more  or 
less  available.  As  a  means  of  checking  fraud  and  stop- 
ping that  '  leakage '  and  waste  that  has  been  so  prevalent 
in  the  earlier  attempts  at  taxation,  they  may  be  regarded 
as  valuable  contributions  to  Finance.  The  best  devised 
duty  from  a  purely  economic  point  of  view  may  fail  in. 
consequence  of  technical  obstacles.  In  fact,  the  application 
of  taxation  is  always  dependent  on  a  careful  observance  of 
these  special  circumstances.  All  the  details  of  a  duty  are 
important  in  this  connexion.  Thus,  the  rate  to  be  im- 
posed must  be  regulated  with  reference  to  the  intensity  of 
the  demand  for  the  article,  the  gradations  of  the  several 
qualities,  and  the  effective  power  of  testing  that  exists. 
The  reasons  for  the  repeal  of  the  English  paper  and  sugar 
duties  were  partly  founded  on  the  difficulties  of  discrimina- 
tion :  the  adjustment  of  the  American  spirit  duties,  in  order 


480  PUBLIC    FINANCE.  [BOOK  IV. 

j 

to  meet  the  risks  of  illicit  distilling  and  secure  the  highest 
return,  has  been  shown  by  Mr.  Wells  to  rest  on  similar 
grounds.  The  treatment  of  the  different  forms  of  spirits 
and  beer  in  Germany  has  been  largely  conditioned  by 
consideration  of  the  effects  of  different  methods  of  levying 
duties  on  the  development  of  the  industries  and  the  re- 
ceipts of  the  State. 

Nor  is  it  merely  the  conditions  that  exist  within  the 
particular  country  that  have  to  be  considered.  With  the 
modern  agencies  of  transport  no  community  can  be  re- 
garded as  an  isolated  unit.  Its  methods  of  taxing  com- 
modities will  be  influenced  by  the  economic  and  fiscal 
systems  of  other  countries.  Due  adjustment  ought  to  be 
reached  between  excise  and  customs,  and  the  trade  rela- 
tions with  outside  producers  and  consumers  should  be 
carefully  studied.  The  greatest  prospect  of  advance  in 
financial  arrangements  probably  lies  in  this  direction.  To 
expect  uniform  taxation  in  all  European  countries  would 
be  Utopian,  but  there  is  room  for  approximation  in  the 
selection  of  the  articles  to  be  taxed,  and  in  the  rates  of 
duty  imposed.  Thus,  the  treatment  of  alcojjol  and  tobacco 
might  possibly  be  made  the  same  in  a  good  many  nations, 
and  thereby  the  obstruction  to  industry  and  risk  of  contra- 
band traffic  in  great  measure  avoided.  Even  at  present 
the  monopoly  system,-  as  regards  the  latter  article,  is  in 
force  in  France,  Austria,  Italy,  Spain,  and  some  smaller 
states,  and  may  possibly  be  introduced  into  Germany. 
The  rule  of  imposing  higher  duties  on  the  more  intoxi- 
cating spirits  is  now  very  generally  adopted,  though  there 
is  room  for  more  complete  agreement  in  both  the  mode  of 
taxation  and  the  rates  fixed. 

Finally,  then,  while  it  is  evident  that  the  forms  and 
extent  of  internal  taxes  on  commodities  must  depend  on 
the  financial  necessities  and  the  particular  conditions  of  each 
country,  it  is  also  beyond  doubt  that  what  is  vaguely  called 
'  the  progress  of  society '  must  lead  to  greater  uniformity 
in  both  respects,  though  it  would  be  premature  to  con- 


CHAP.  VI.]        INTERNAL  TAXES  ON  COMMODITIES.  481 

jecture  what  will  be  the  exact  form  of  that  common 
system. 

§  12.  To  complete  our  account  of  internal  taxation  it  is 
necessary  to  notice  its  position  in  local  Finance.  The 
United  Kingdom  and  the  American  Union  are  very  mark- 
edly distinguished  from  other  countries  by  their  freedom 
from  indirect  taxes  for  local  purposes.  There  have  been 
some  cases  of  'ingate'  tolls  in  English  and  Irish  towns, 
and  the  London  wine  and  coal  dues  were  a  more  important 
instance,  but  with  these  exceptions  internal  trade  has  been 
altogether  relieved  of  duties.  This  freedom  of  commerce 
was  according  to  Adam  Smith  one  of  the  reasons  for  the 
greater  prosperity  of  the  country.  The  Constitution  of 
the  United  States,  enforced  by  the  resolute  action  of  the 
courts,  secured  internal  free  trade  over  the  whole  area  of 
the  Union I  and  prevented  the  establishment  of  any  local 
barriers. 

In  continental  countries  a  very  different  state  of  things 
has  prevailed.  Everywhere,  in  one  form  or  another,  duties 
have  been  levied  on  goods  entering  into  cities.  These  taxes, 
which  may  be  traced  back  to  the  dues  (portoria)  imposed 
by  the  cities  under  the  Roman  Empire,  were  adopted  by  the 
communes  as  a  ready  means  of  acquiring  funds.  So  early 
as  the  thirteenth  century  we  find  them  in  force  in  France, 
and  their  development  continued  till  in  the  seventeenth 
century  nearly  every  town  possessed  them.  The  ministers 
of  Louis  XIV  saw  in  this  form  of  tax  a  valuable  resource 
for  the  hard-pressed  Finances  of  the  Kingdom,  and  accord- 
ingly a  part  of  the  octrois  was  appropriated  for  the  use  of 
the  State,  a  system  that  continued  down  to  the  Revolution. 
Other  countries  had  the  same  system ;  the  German  towns 
levied  duties  on  the  commodities  entering  within  their 
walls,  and  both  the  Empire  and  the  territory  of  Brandenburg 
derived  revenue  for  their  general  purposes  through  the 
town  taxes2. 

1  Constitution  of  the  United  States,  Art.  i.  §  10. 

2  Supra,  §  9. 

I  i 


482  PUBLIC   FINANCE.  [BOOK  IV. 

The  abolition  of  the  octrois  by  the  Constituent  Assembly, 
and  their  re-introduction  a  few  years  later,  have  been 
already  mentioned  1.  In  other  countries  the  same  popular 
sentiments  and  the  same  pressure  of  actual  facts  have 
made  their  influence  felt.  No  form  of  taxation  is  more 
oppressive  on  the  artisan  and  small  trading  classes,  and 
it  has,  besides,  an  indirect  effect  on  the  rural  producers. 
On  the  other  hand,  where  direct  taxation  is  extensively 
employed  by  the  general  government,  it  is  hard  for  local 
authorities  to  devise  any  less  inconvenient  form  of  duty 
that  will  supply  an  equal  revenue.  The  opposed  forces 
are  seen  in  operation  in  the  history  of  octrois  in  the  present 
century.  There  has  been  a  disposition  to,  as  far  as  possible, 
get  rid  of  these  troublesome  imposts,  while  at  the  same 
time  they  continue  in  several  countries  as  a  source  of  local, 
and  even  of  general  revenue. 

§  13.  France  in  particular  possesses  a  carefully  arranged 
system.  Municipal  Councils  are  empowered,  and  in  cer- 
tain cases  compelled,  to  establish  an  octroi,  which  is  dis- 
tinctly recognised  as  a  tax  of  consumption.  The  objects 
to  be  taxed  may  be  food,  drinks,  fuel,  fodder,  and  materials, 
but  the  power  of  taxing  is  limited  by  restrictions,  which 
exclude  articles  already  heavily  taxed  by  the  State  or 
monopolized  by  it.  Octrois  on  intoxicating  drinks  are  spe- 
cially regulated  so  as  to  bear  a  proportion  to  the  general 
taxation  of  those  objects  2. 

The  system  applies  to  1523  communes,  or  about  one  in 
twenty-four  of  the  entire  number ;  but  as  it  includes  all  the 
large  towns,  its  operation  directly  affects  one-third  of  the 
population  (12.500,000).  The  greater  number  of  communes 
(887)  raise  the  duties  themselves.  State-officials  manage 
over  250,  and  400  are  farmed  out  at  a  rent.  The  city  of 
Paris  has  a  special  regime ;  which  extends  to  the  outlying 
communes  and  is  administered  by  the  Prefet  of  the  Seine. 
A  considerable  revenue  is  obtained  from  this  source.  In 
1889  it  amounted  to  £12,000,000,  a  little  over  one-half  of 

1  Supra,  §  6.  2  Vignes,  i.  205-16. 


CHAP.  VI.]        INTERNAL  TAXES  ON   COMMODITIES.  483 

which  was  raised  in  Paris.  This  amount  is  an  increase 
over  earlier  years.  From  less  than  £2,500,000  in  1823  ^ 
had  risen  to  £3,800,000  in  1853,  and  nearly  £8,000,000  in 
1872.  This  growth  is  due  to  the  larger  population  of  the 
towns  and  their  improved  condition 1. 

The  Italian  octroi  duties  in  their  present  rigorous  form 
only  date  from  1864:  some  of  the  smaller  States  had  used 
them,  but  Sardinia  and  Tuscany  were  comparatively  free  2. 
Since  the  first  measure  on  the  subject  several  further  orders 
and  decrees  have  extended  the  system,  until  it  has  come 
to  be  productive  of  a  large  revenue  as  well  as  extremely 
oppressive.  Without  again  considering  that  part  of  the 
duties  which  goes  to  the  general  revenue  3,  it  appears  that 
in  addition  to  further  charges  on  the  articles  already  taxed 
by  the  state  .octroi)  there  are  duties  on  a  large  number  of 
goods  arranged  into  the  same  categories  as  in  France,  with 
an  extra  division  for  colonial  produce.  The  result  is  that, 
in  contrast  with  the  French  duties,  foreign  goods  already 
submitted  to  customs  taxation  are  taxed  over  again  on 
their  entry  within  the  '  closed '  communes,  and  that  both 
the  cost  of  living  and  the  distribution  of  industry  are 
injuriously  affected.  The  duties  vary  according  to  the 

1  The  distribution  of  the  duties  among  the  different  articles  is  shown  by  the 
following  figures  for  the  year  1889 — 

Francs.          Percentage  of  total. 

28-4 
10-9 

5-4 
8.7 


Drinks  and  Liquids  . 

135,291,342 

Food 

85,090,337 

Fuel 

32,565,756 

Fodder    . 

16,218,211 

Materials 

25,976,552 

Miscellaneous  . 

4,521,778 

Total         299,663,976  100-0 

Of  the  total  on  drinks,  73,500,000  francs  were  levied  on  wine,  26,000,000 
francs  on  spirits,  and  17,250,000  francs  on  beer.  Meat  paid  56,000,000  francs, 
or  two-thirds  of  the  total  on  food.  The  cost  of  collection  hi  1889  came  to  about 
£1,000,000,  which  should  be  deducted  from  the  gross  receipts  of  £12,000,000. 

3  Only  six  Tuscan  communes  had  octrois  out  of  246,  and  only  one  in  every 
ten  of  those  in  the  kingdom  of  Sardinia.  '  Report  on  the  Octroi  duties  in  Italy,' 
Parliamentary  Papers  (C.  6206),  1891. 
3  Sitpra,  §  8. 

I  i  2 


484  PUBLIC   FINANCE.  [BOOK  IV. 

population  of  the  town,  and  are  levied  on  sales  in  the 'open' 
or  rural  districts.  The  revenue  received  by  the  Italian 
communes  from  these  taxes  in  1884  was  ^"4,400,000,  which, 
taken  together  with  the  part  that  goes  to  the  central 
Government,  represents  a  much  heavier  burden  than  that 
imposed  in  France  by  the  same  class  of  duties.  A  complete 
separation  between  the  tax  systems  of  the  general  and  local 
governments  would  seem  desirable,  and  might  be  accom- 
plished either  by  the  exchange  of  the  state  octrois  for  the 
local  direct  taxes,  or  better  still  by  a  complete  reform  of  the 
methods  of  indirect  taxation. 

The  various  German  States  have  gradually  reduced  their 
indirect  local  taxation.  Some  German  towns  retain  the 
octrois  as  a  supplemental  resource.  In  Bavaria  this  method 
is  adopted,  but  the  list  of  articles  is  not  at  all  so  extensive 
as  either  in  France  or  Italy.  North  Germany  is  for  the 
most  part  free  from  octrois^  though  a  beer  duty  is  levied,  as 
e.g.  in  Berlin.  In  any  case  this  form  of  taxation  is  of 
minor  importance  for  the  German  cities.  Austria  and 
Hungary  use  the  octroi  system  more  extensively;  some 
of  the  funds  obtained  in  this  way  are  taken  for  the  central 
Government,  and  the  local  taxes  appear  as  additions  to 
these  state  charges 1. 

More  radical  measures  have  been  applied  in  some  other 
countries.  Belgium,  as  we  saw  2,  abolished  these  taxes  in 
1860,  and  was  followed  by  Holland  in  1866,  and  by  Spain 
in  1868,  though  the  last-named  country  had  soon  to  return 
to  the  old  method.  Denmark  and  Switzerland  are  practi- 
cally without  octrois,  which  are  also  of  little  importance 
in  Portugal  and  Sweden  3. 

1  For  the  German  octrois,  see  Cohn,  §§  457  sq. ;  cp.  Schaffle  'In  Deutsch- 
land  sind  die  Octrois  von  geringer  Bedeutung,  der  Bieraufschlag  in  Bayern  und 
einige  neuere  Verbrauchsabgaben  Wiirttembergs  ausgenommen.    Belangreicher 
sind  sie  schon  in  Oesterreich ;  Wien  zieht  aus  den  stadtischen  Verzerungssteuern 
eine  ansehnliche  Summe,'  Steuerpolitik,  452. 

2  Bk.  iii.  ch.  6.  §  6. 

3  Isolated  octrois  may  be  found  in  all  these  countries,  e.  g.  that  at  Copen- 
hagen. 


CHAP.  VI.]         INTERNAL  TAXES  ON   COMMODITIES.  485 

§  14.  When  considering  the  general  principles  of  indirect 
taxation,  we  concluded  that  its  employment  in  local  Finance 
was  objectionable,  and  certain  to  disappear  under  the  influ- 
ence of  sounder  ideas  on  the  subject  of  taxation.  The  fact 
that  so  many  countries  can  successfully  manage  their  muni- 
cipal administration  without  recourse  to  indirect  taxes  is  of 
itself  a  strong  point  against  their  continuance.  They  have 
the  unfortunate  peculiarity  of  combining  the  defects  of 
customs  and  excise  duties ;  for  they  hinder  trade  between 
town  and  country  and  impose  heavy  pressure  on  urban 
industries  and  consumers.  Thus  the  materials  for  house- 
building are  taxed  both  in  France  and  Italy ;  the  ordinary 
articles  of  the  labourer's  consumption  are  compelled  to  pay 
toll  before  they  reach  him,  and  so  are  many  of  the  mate- 
rials on  which  he  works.  Inequality  of  distribution  is  ' 
another  glaring  defect  in  the  octroi  system,  which  varies  in 
its  incidence  from  place  to  place  and  between  different 
classes.  The  one  valid  argument  in  its  defence  is  the  plea 
of  necessity.  To  surrender  £11,000,000  of  the  French 
communal  revenue  would  be  a  hazardous  step  until  an 
assured  equivalent  was  provided.  This  is  the  problem 
that  reformers  have  to  face,  and  the  usual  proposal  has 
been  the  introduction  of  direct  local  taxes  as  a  substitute. 
The  difficulty  of  this  plan  lies  in  the  resistance  that  most 
of  the  communes  would  offer  to  it.  M.  Leon  Say's  more 
fundamental  method  would  alter  the  existing  relations  of 
the  general  and  local  governments,  and  place  the  direct 
taxes  at  the  disposal  of  the  latter,  giving  them  at  the  same 
time  increased  functions1.  Another,  and  perhaps  more 
feasible  proceeding  would  be  to  follow  the  Belgian  prece- 
dent, and  pay  over  a  part  of  the  general  indirect  taxation 
to  the  communes  in  lieu  of  octrois.  One  important  con- 
sideration indicated  by  M.  Say  is  the  distinction  between 
the  fifty  towns  having  over  30,000  inhabitants,  whose  net 
revenue  from  this  source  is  £9,000,000,  and  the  remaining 
1470  communes  that  gain  only  £2,000,000.  It  is  obvious 

1  Journal  des  £conomisteS)  December  1891,  449-461. 


486  PUBLIC   FINANCE.  [BOOK  IV. 

that  the  latter  class  might  easily  replace  their  indirect 
taxes  by  additions  to  the  contributions  directes.  Even  the 
remaining  towns — when  Paris  with  its  net  receipt  of 
^5,600,000  is  deducted — ought  to  be  able  to  furnish  the 
£3,400,000  that  would  be  needed  by  a  development  of  the 
general  taxation  of  spirits. 

The  case  of  Italy  is  a  harder  one  ;  though  the  burden  of 
the  duties  is  greater,  so  is  also  the  need  of  revenue ;  and  thus 
for  the  present  it  seems  that  reform  rather  than  abolition 
is  advisable.  Exemption  of  the  materials  of  industry,  low 
rates  on  articles  of  necessary  consumption,  together  with 
greater  uniformity  in  the  different  tariffs,  might  be  carried 
out  with  advantage  to  the  revenue ;  and  these  measures 
would  prepare  the  way  for  further  reforms. 

§  15.  The  last  question  that  has  to  be  discussed  is  that 
of  the  incidence  of  taxes  on  consumption.  Everyone  is 
familiar  with  the  proposition  that  they  fall  on  the  consumer 
and  are  intended  to  be  a  deduction  from  his  income  when 
he  comes  to  employ  it.  It,  however,  appeared  that  the 
process  by  which  taxes  are  shifted  is  not  so  simple  or 
uniform  as  this  statement  assumes l.  That  ultimately  and 
'  in  the  long  run '  the  bulk  of  the  taxation  of  commodities 
falls  on  the  general  body  of  consumers  is  undoubtedly  true, 
but  this  is  in  fact  the  case  with  a  general  income-tax, 
which  arrests  the  funds  previously  to  their  expenditure. 
But  before  we  assert  that  a  tax  on  a  particular  commodity 
comes  out  of  the  pockets  of  the  consumers  of  that  com- 
modity, we  must  be  satisfied  of  three  things,  viz.  (i)  that 
none  of  the  burden  remains  on  the  producer  who  pays  the 
tax  immediately,  (2)  that  none  of  it  is  thrown  back  on 
other  producers  or  owners  of  land  or  capital  who  contribute 
to  the  production,  and  (3)  that  the  consumer  has  no  way  of 
passing  on  the  burden  to  another  set  of  persons.  The 
realization  of  these  conditions  is  not  always  found.  In 
some  cases  the  producer  has  a  complete  or  qualified 
monopoly,  or  more  accurately  a  differential  advantage, 

1  Bk.  iii.  ch.  5.  §  5. 


CHAP.  VI.]         INTERNAL  TAXES  ON  COMMODITIES.  487 

and  when  this  is  so  he  bears  the  burden  in  whole  or  part. 
Again,  the  limitation  of  demand  caused  by  taxation  leads 
to  a  lower  value  of  land  or  fixed  capital  or  specialized 
labour  suited  for  the  industry,  in  which  case  some  of  the 
loss  falls  on  the  particular  agent  so  affected.  Finally,  and 
this  fact  has  been  even  exaggerated  in  the  *  orthodox ' 
theory  of  incidence,  the  additional  cost  of  living  may  lead 
to  a  higher  rate  of  wages,  which  must  inevitably  lower 
interest  or  employers'  gain,  unless  indeed  it  is  limited  to 
certain  groups  of  workers,  when  the  consumers  of  their 
products  may  bear  the  burden. 

Applying  these  general  facts  to  existing  tax  systems,  it  is 
an  interesting  question  to  consider  how  far  the  abolition  of 
the  present  English  excise  would  (a)  increase  the  profits  of 
brewers  and  distillers  as  well  as  retail  traders,  (b]  allow  of 
higher  prices  for  barley,  hops,  sugar  and  other  materials  of  the 
kind,  or  (c)  cause  a  lowering  of  wages  in  consequence  of  the 
smaller  drink  bill  of  the  labourer  and  artisan.  That  each 
of  these  effects  would  in  some  degree  be  produced  is,  we 
believe,  indisputable ;  but  so  much  depends  on  conditions 
that  cannot  be  even  approximately  estimated,  that  it  would 
be  impossible  to  offer  a  conjecture  as  to  their  relative 
strength.  The  effect  on  other  industries  through  the 
sums  set  free  from  the  purchase  of  drink,  or  the  increased 
labour  and  capital  required  in  the  distilleries  and  breweries 
if  the  total  expenditure  on  drink  remained  as  before,  would 
be  a  further  puzzle.  Now,  if  the  remission  of  these  duties 
would  produce  such  effects,  it  is  unquestionable  that  the 
development  of  the  modern  excise  has  caused,  not  perhaps 
quite  the  same,  but  quite  as  complex  and  important 
changes.  When  we  take — as  financiers  and  statisticians 
too  readily  do — the  actual  distribution  of  taxation  as  a 
guide  to  its  real  effects,  we  should  never  forget  the  far  more 
intricate  problems  that  the  working  of  a  set  of  taxes 
imposed  on  a  complex  economical  system  is  sure  to 
raise. 

If  this  be  true  of  the  very  simple  and  easily  examined 


488  PUBLIC   FINANCE. 

excise  of  England  it  holds  good  with  still  greater  force  of 
the  more  elaborate  systems  of  France,  Germany,  and  Italy. 
Where  several  articles  are  taxed  the  effects  are  sure  to 
become  intermixed  ;  e.  g.  a  duty  on  sugar  tends  to  combine 
with  duties  on  breweries  where  that  article  is  used  as  a 
material.  Especially  where  taxation  is  different  in  different 
cases  we  may  expect  complicated  results  ;  the  heavier  duty 
on  wines  entering  French  towns  is  surely  an  element  in  the 
cost  of  living,  and  probably  in  the  wages  of  the  workmen 
residing  in  them,  and  hence  on  the  price  of  the  goods  pro- 
duced in  such  places,  while  this  altered  price  may  cause 
a  redistribution  of  industry. 

The  octrois  exhibit  some  of  the  best  examples  of  the 
practical  existence  of  these — at  first  sight  far-fetched — posi- 
tions. One  of  the  arguments  of  the  defenders  of  local 
taxation  of  commodities  is  that  their  incidence  is  not  really 
on  the  consumer,  who  would  not  benefit  by  their  abolition. 
It  is  pointed  out  that  in  many  cases  the  reduction  or  re- 
moval of  the  town  barriers  has  not  lowered  prices.  The 
gain  is  reaped  by  the  producer  or  trader 1.  So  far  as  this 
argument  has  any  truth  it  illustrates  the  proposition  that  we 
have  already  laid  down,  though  it  is  hardly  a  good  defence 
of  the  system  2.  In  like  manner  it  has  been  argued  that 
the  Italian  octroi  system  has  compelled  manufacturers  to 
establish  their  industries  in  agricultural  districts  where  the 
cost  of  subsistence  is  not  artificially  enhanced  3.  But  what 
is  apparent  in  the  limited  sphere  of  local  taxation  must  be 
equally  operative,  though  its  influence  is  harder  to  trace,  in 
the  wider  field  of  state  economy. 

1  This  argument  will  reappear  in  connexion  with  the  incidence  of  import 
duties. 

2  This  has  been  alleged  of  the  Belgian  reform  and  also  of  the  partial  re- 
mission of  the  Parisian  octroi  in  1848. 

3  Report  on  Octroi  Duties.  (C.  6206),  14,  15. 


CHAPTER  VII. 

CUSTOMS  DUTIES. 

§  1.  THE  taxation  of  goods  at  the  frontier  or  on  passing 
a  fixed  boundary  line — what  is  known  in  England  as  the 
customs  revenue — is  far  older  than  the  system  of  internal 
duties.  Almost  from  the  origin  of  commerce  we  can  find 
traces  of  its  employment,  and  can  note  its  gradual  develop- 
ment into  an  important  source  of  state  income.  Nor  has 
it  as  yet  lost  much  of  its  prominence.  Notwithstanding 
the  great  increase  of  other  branches  of  taxation,  customs 
are  still  a  conspicuous  part  of  nearly  every  national  budget, 
and  in  some  countries  are  regarded  as  the  only  convenient 
mode  of  levying  dues  on  consumption  *. 

The  most  primitive  form  of  this  kind  of  taxation  is 
probably  that  known  as  a  transit  duty,  imposed  on  goods 
passing  through  a  district.  Modern  African  travellers  have 
made  us  familiar  with  the  '  gifts '  demanded  by  each  petty 
chief  in  return  for  leave  to  go  through  his  country,  an 
exaction  which  in  the  trader's  case  is  practically  a  tax  on 
the  wares  that  he  carries.  How  natural  such  a  system  is 
its  revival  in  the  earlier  Middle  Ages  shows.  In  that  dis- 
orderly condition  of  society  each  lord  or  seigneur  asserted 

1  The  English  Customs  revenue  for  1890-1  was  ^19,480,000  or  nearly 
22  per  cent,  of  the  gross  receipts.  In  France  the  amount  for  1891  is  estimated 
at  ^15,400,000  or  12  per  cent,  of  the  revenue.  The  German  Customs  for 
1889-90  were  estimated  at  .£13,500,000,  and  the  Italian  at  .£10,600,000  or 
26  and  15  per  cent,  respectively.  A  much  larger  proportion  of  the  United 
States  Federal  revenue  (over  one  half)  is  obtained  from  this  source,  .£44,000,000 
out  of  .£78,500,000  in  1890-1. 


49°  PUBLIC   FINANCE.  [BOOK  IV. 

his  right  to  charge  dues  on  goods  in  passage,  basing  his 
claim  on  the  services  that  he  rendered  by  keeping  the 
roads,  bridges,  and  water-ways  in  fit  condition,  and  by  pro- 
tecting the  trader  against  violence.  The  collection  of  the 
tolls  was,  however,  far  more  regular  than  the  performance 
of  the  corresponding  services,  and  therefore  the  first  efforts 
of  reviving  commerce  and  increased  royal  power  were 
directed  towards  the  curtailment  of  such  vexatious  dues, 
which  were  either  abolished  or  confined  to  payment  for 
actual  service  done  V  The  use  of  transit  duties  was  how- 
ever continued  in  state  taxation,  and  they  have  only  been 
given  up  in  the  present  century. 

IsLext  in  historical  order  comes  the  export  duty,  levied  on 
commodities  as  they  leave  the  State's  territory.  The  reasons 
for  the  employment  of  this  kind  of  duty  in  early  times  can 
hardly  be  adequately  appreciated,  without  considering  the 
differences  in  economic  beliefs  and  conditions.  By  taxing 
exports  it  was  thought  that  the  foreigner  was  made  to  pay 
a  high  price  for  native  wares,  or  at  worst  that  a  more 
abundant  supply  was  kept  for  the  home  consumer.  Even 
if  the  burden  should  fall  on  the  native  producer,  the  article 
taxed  was  generally  an  important  one,  and  its  proprietors 
were  bound  to  contribute  to  the  public  revenue.  In  fact 
the  export  duty  is  often  a  mitigation,  introduced  in  the 
interests  of  the  Exchequer,  of  the  more  rigorous  prohi- 
bition of  export. 

The  field  of  action  for  export  taxes  has  been  greatly 
diminished  by  the  influence  of  the  mercantile  system2, 
which,looking  on  exportation  as  advantageous,  was  naturally 
hostile  to  anything  calculated  to  restrict  it.  The  few  ex- 
ceptions that  it  admitted  for  special  reasons  3  have  since 
been  removed  by  the  change  in  commercial  policy,  so  that 
the  use  of  export  duties  is  now  on  a  very  limited  scale. 

1  For  the  great  number  of  tolls  and  passage  duties  in  mediaeval  times,  see 
Clamageran,  i.  160-1;    Pigeonneau,  Histoire  du  Commerce  de  la  France,  \. 
96-99,  182-3  :  for  Germany,  Zimmern,  Hansa  Towns,  102. 

2  See  Introd.  Part  ii.  §  5. 

3  For  this  side  of  Mercantilism,  see  Wealth  of  Nations,  Bk.  iv.  ch.  8. 


CHAP.  VII.]  CUSTOMS   DUTIES.  49! 

The  decline  of  the  older  forms  of  customs  taxation  has 
not  affected  the  import  duties,  which  indeed  have  come  to  be 
regarded  as  synonymous  with  the  customs.  The  complete 
abolition  of  duties  on  exports  would  hardly  affect  the 
Finances  of  European  States,  but  anything  that  disturbed 
the  revenue  from  imports  would  be  the  cause  of  grave 
concern  to  nearly  all  nations 1.  Though  probably  of 
somewhat  later  origin  than  transit  or  export  dues,  duties 
on  imports  were  well  established  at  an  early  period.  They 
were  employed  under  the  Roman  Empire,  with  separate 
customs  lines  or  points  for  each  province  2,  but  the  rates 
were  moderate,  not  exceeding  five  per  cent,  ad  valorem. 
The  break-up  of  the  Empire  brought  back  the  ruder  state 
of  things  already  described,  and  it  was  not  till  royal 
authority  became  somewhat  firmly  established  that  duties 
on  imports  were  effectively  levied.  The  cities  exercised 
the  power  of  taxing  goods,  each  in  its  local  market,  which 
was  in  many  cases  the  same  as  an  import  duty,  but  the 
great  agency  in  the  development  was  the  expansion  of  the 
King's  administration.  England  supplies  the  earliest  ex- 
ample with  its  'customary'  dues  on  wine,  accompanied  by 
the  heavy  tax  on  exported  wool  3.  Other  European  coun- 
tries followed  the  same  course.  France,  e.  g.  adopted 
import  taxation  at  a  later  date,  export  and  transit  dues 
being  at  first  more  prominent.  As  trade  increased,  and  as 
the  desire  of  encouraging  national  industry  took  a  firmer 
hold,  resort  to  import  dues  became  more  frequent.  The 
rise  of  mercantilism,  discernible  in  England  from  the  time 
of  the  Tudors,  and  in  France  from  the  sixteenth  century  4, 
supplied  a  fresh  force  in  favour  of  this  form  of  taxation, 
while  it  tended  to  lower  its  financial  importance  in  compari- 

1  India  is  perhaps  the  only  country  in  which  the  revenue  from  exports 
exceeds  that  from  imports. 

a  Mommsen,  Hist,  of  Rome,  iii.  397-8  ;  Merivale,  Romans  under  the  Empire, 
iv.  45 ;  Clamageran,  i.  73. 

3  Dowell,  i.  75  sq. 

4  For  England,   see  Schanz,  Englische  Handelspolitik,   and   Cunningham, 
Growth  of  English  Industry;  for  France,  Pigeonneau,  ut  supra. 


492  PUBLIC   FINANCE.  [BOOK  IV. 

son  with  its  use  in  assisting  native  producers  against  their 
foreign  competitors. 

Among  the  great  services  that  Adam  Smith  performed 
in  the  cause  of  sound  Finance,  his  establishment  of  the  true 
function  of  import  duties  was  undoubtedly  one.  His 
vigorous  attack  on  their  employment  as  an  instrument 
of  economic  policy  helped  materially  to  bring  out  their  true 
use  asjiJjscaJLagency.  To  gain  a  large  revenue  and  at  the 
same  time  protect  native  industry  from  the  entry  of  foreign 
goods  was,  he  plainly  showed,  impossible l.  The  revenue 
duty  is  not  protective,  and  the  protective  duty  is  not 
revenue-yielding.  The  influence  of  Adam  Smith's  teach- 
ing on  administrators,  and  the  need  of  revenue  in  conse- 
quence of  increasing  outlay  have  led  to  at  least  a  partial 
recognition  of  the  financial  aims  of  import  taxation.  Even 
in  countries  that  adhere  to  a  rigid  system  of  protection,  some 
of  the  duties  are  solely  productive  of  revenue,  and  in  all,  the 
financial  aim  crosses  and  modifies  the  political  one.  A  great 
deal  of  the  modern  protectionist  revival  is  really  due  to 
the  need  of  revenue  to  meet  growing  expenditure.  The 
general  adoption  of  a  purely  financial  customs  system,  with 
complete  exclusion  of  all  other  aims,  may  be  long  deferred, 
but  state  requirements  will  always  secure  that  the  gaining 
of  funds  shall  be  one  of  the  objects  aimed  at.  The  real 
danger  lies  rather  in  the  probability  of  the  methods  em- 
ployed being  wasteful  and  unduly  oppressive  to  the  con- 
sumers. 

§  2.  In  order  to  understand  the  position  of  the  customs 
in  the  fiscal  system,  it  is  essential  to  see  that  they  are 
in  reality  a  form  or  mode  of  collection,  rather  than  a  dis- 
tinct branch  of  taxation.  This  point  has  been  indicated 
before 2,  but  it  is  worthy  of  repetition.  Whether  a  given 
commodity — say  salt — is  taxed  directly  in  the  possession 

1  '  Taxes  proposed  with  a  view  to  prevent,  or  even  to  diminish,  importation 
are  evidently  as  destructive  of  the  revenue  of  the  customs  as  of  the  freedom 
of  trade,'  Wealth  of  Nations,  191. 

3  Bk.  iv.  ch.  5.  §  2. 


CHAP.  VII.]  CUSTOMS  DUTIES.  493 

of  the  consumer,  or  indirectly,  either  by  excise  supervision 
over  the  producer,  by  making  the  production  a  state 
monopoly,  or,  finally,  by  levying  a  duty  at  the  frontier,  is  in 
one  respect  immaterial,  as  any  of  these  methods  secures 
taxation  of  consumption.  The  separate  treatment  of  the 
customs  is  only  defensible  on  historical  and  technical 
grounds.  This  fundamental  unity  of  the  various  forms  of 
taxation  on  consumption  at  once  leads  to  the  conclusion 
that  most  of  the  conditions  governing  the  excise  may  be 
applied  without  hesitation  to  the  customs.  Thus  the  whole 
formation  of  the  tariff  should  be  determined  by  the  parallel 
system  of  internal  taxation,  and  the  duties  of  both  should 
be  exactly  the  same.  No  one  has  disputed  the  justice  of 
imposing  a  customs  duty  where  an  excise  one  is  already  in 
force.  To  allow  e.g.  foreign  spirits  to  enter  duty  free,  while 
native  ones  paid  heavily,  would  at  once  reduce  the  revenue 
and  divert  the  normal  course- of  industry.  But  exactly  the 
same  reason jn.gr  applies  t^  the  case  of  an  import  duty  with- 
out an  equivalent  excise  one.  Expenditure  is  in  this  case 
also  divertgcL  with  the  double  evil  of  forcing  some  of  the 
consumers  to  take  what  is  in  their  opinion  an  inferior 
article  and  depriving  the  State  of  funds. 

The  problems  of  the  excise  as  to  the  number  of  taxed 
articles  and  their  selection  reappear  in  connexion  with  the 
customs,  though  some  modifying  circumstances  also  occur. 
As  regards  the  first,  it  is  abundantly  established  that  for 
productiveness  only  a  small  number  of  commodities  should 
be  taxed.  This  is  best  shown  by  the  fact  that  in  all 
countries  the  really  productive  articles  are  few  in  number. 
Before  the  restrictive  system  had  been  seriously  altered  in 
England  (1839),  five-sixths  of  the  receipts  came  from  nine 
articles.  Forty  years  later  (1880),  three-fourths  of  the 
French  customs  revenue  was  raised  on  eight  principal 
commodities,  and  in  1887,  corn,  coffee,  tobacco,  and  wine 
provided  more  than  one-half  of  the  German  receipts  from 
this  head  l.  The  lesson  of  the  excise  is  repeated  in  respect 

1  Report  of  Import  Committee  (1840) ;  Leroy  Beaulieu,  i.  615  ;  Cohn,  §  407. 


494  PUBLIC   FINANCE.  [BOOK  IV. 

to  the  customs.  It  is  further  clear  that  more  than  a  single 
article  will  have  to  be  taxed.  To  secure  the  maximum  of 
revenue  with  the  minimum  of  friction,  it  is  expedient  to  get 
a  sufficiently  broad  field  on  which  to  operate.  By  this 
means  the  stability  of  the  revenue  is  best  secured.  A 
particular  commodity  may  fluctuate  in  its  yield  from  year 
to  year,  but  the  general  customs  revenue  can  be  made  to 
annually  approximate  to  a  certain  amount  for  a  long  series 
of  years 1.  The  adoption  of  a  pure  revenue  system  greatly 
assists  in  the  attainment  of  this  desirable  result. 

The  administration  of  the  customs  is  relieved  from  one 
of  the  technical  difficulties  of  the  excise.  Its  treatment  of 
all  commodities  is  very  much  alike,  and  there  is  no  inter- 
ference with  the  work  of  production,  or  the  'development  of 
industries ;  nevertheless  other  complications  arise.  The 
supervision  of  a  long  frontier  is  an  arduous  task,  and  where 
high  duties  are  imposed,  contraband  trade  can  hardly  be 
prevented.  The  more  portable  commodities  are  therefore 
not  fitted  to  bear  heavy  duties,  and,  in  fact,  the  limitation 
of  taxation  to  products  of  distant  countries,  and  to  fairly 
bulky  articles  would,  from  this  point  of  view,  be  advisable. 

It  has  been  suggested  as  a  rule  of  fiscal  policy,  that 
customs  duties  should,  as  far  as  possible,  be  placed  only 
on  those  goods  that  are  not  produced  at  home.  This, 
however,  is  hardly  practicable,  since,  even  where  the  exact 
commodity  is  not  of  native  production,  some  available 
substitute  is,  and  a  tax  that  stimulates  the  use  of  sub- 
stitutes is,  in  principle,  as  vicious  as  a  protective  duty.  This 
problem  arises  in  connexion  with  the  English  tea  and  coffee 
duties,  but  is  not  in  their  case  of  much  practical  weight. 

The  further  questions  as  to  the  treatment  of  necessaries 
and  raw  materials  must  be  answered  in  the  same  way  as 
in  the  excise.  Both  are  injurious,  if  they  can  be  avoided, 

1  The  English  revenue  from  this  source  has  kept  very  near  .£20,000,000  per 
annum  for  the  last  thirty  years.  In  the  period  1815-1890  it  has  only  varied 
between  £24,000,000  and  ;£i  9,000,000  notwithstanding  the  extensive  remissions 
of  taxation. 


CHAP.  VII.]  CUSTOMS   DUTIES.  495 

but  the  wants  of  the  State  may,  as  we  saw  \  compel  the 
taxation  of  such  articles  as  salt  and  corn,  in  which  case  the 
customs  system  must  levy  its  part  of  the  tax.  Taxes  on 
raw  materials,  though  they  impede  industry  and  raise 
prices  unduly,  may,  on  the  whole,  be  the  least  vexatious 
mode  of  reaching  a  particular  class  that  would  not  other- 
wise contribute  its  share.  A  tax  on  raw  cotton  might 
e.  g.  be  the  most  effective  and  least  irritating  way  of  taxing 
the  consumers  of  calico  2. 

In  fine,  the  customs  system  requires  to  be  thoroughly 
adapted  to  the  conditions  of  the  general  taxation  on  con- 
sumption, of  which  it  forms  a  part,  and  has  besides  to 
conform  to  the  technical  limits  imposed  by  its  constitution 
and  mode  of  working.  Productiveness,  equity,  and  economy 
both  with  regard  to  the  cost  of  collection  and  theTloss 
imposed  on  the  community  are  the  ends  to  be  realized, 
and  of  these,  the  first  and  last  are  the  most  important,  as 
unfairness  in  the  pressure  of  taxes  on  commodities  can 
be  rectified  by  alleviations  in  other  parts  of  the  tax 
system  3. 

§  3.  The  English  customs  system  is  remarkable  for  its 
rigorous  adherence  to  the  principle  of  purely  financial  duties. 
All  traces  of  a  political  aim  in  the  imposition  of  customs 
charges  have  now  disappeared.  This  result  has,  however, 
been  reached  only  as  the  result  of  a  long  development 
during  which  other  principles  were  operative.  England, 
from  its  insular  position  and  its  stronger  government,  was 
more  favourably  situated  than  any  continental  state  in 
respect  to  this  form  of  tax.  From  being  merely  customary 
charges  on  wine  and  wool,  the  port  duties  expanded  in  the 
seventeenth  century  into  a  broader  system.  The  receipts — 
derived  from  the  general  tax  of  five  per  cent,  on  all 
imports  and  exports,  and  the  duties  on  wine,  cloth,  tobacco, 
silk,  brandy,— rose  from  £127,000  in  1604,  to  nearly 

1  Bk.  iv.  ch.  6.  §  2. 

2  Cp.  Mill's  advocacy  of  a  tax  on  raw  silk,  Principles,  Bk.  v.  ch.  6.  §  2. 

3  Cp.  Bk.  iii.  ch.  3.  §  9  for  this  use  of  a  progressive  tax  on  income. 


496  PUBLIC   FINANCE.  [BOOK  IV. 

£500,000  in  1641,  and  nearly  £1,000,000  in  1688  l.  After 
the  Revolution  they  fell  off,  owing  to  the  French  war  and 
the  increase  of  duties  to  ten  per  cent.,  but  by  1702  they 
came  to  £1,500,000. 

All  through  the  eighteenth  century,  war  and  the  influence 
of  the  mercantile  doctrines  hindered  the  growth  of  the 
customs  revenue  ;  profitable  lines  of  trade  were  closed,  and 
prohibitive  duties  encouraged  smuggling.  The  most  pro- 
minent features  were  the  imposition  of  special  duties,  and 
the  increase  of  the  general  import  duties.  Wines,  spirits, 
sugar,  tea,  and  coffee,  had  all  to  pay  extra  charges,  while 
the  ten  per  cent,  general  charge  of  1698  became  fifteen  per 
cent,  in  1704,  twenty  per  cent,  in  1747,  and  twenty-five  per 
cent,  in  1759.  The  pressure  of  the  American  war  of 
Independence  brought  further  additions  in  the  shape  of 
two  separate  five  per  cent,  increases  on  the  total  duties 
existing  on  each  article,  with  further  extra  duties  on  sugar 
and  tobacco.  Far  greater,  however,  was  the  effect  of  the 
French  wars  (1793-1815),  with  the  enormous  outlay  in 
which  they  involved  the  country.  At  six  different  times 
the  import  duties  generally  were  raised,  besides  heavy 
special  increases  on  particular  commodities.  The  final 
result  was  that  at  the  close  of  the  conflict  in  1815,  the 
tariff  contained  nearly  1400  items,  and  the  rates  were  in 
many  cases  prohibitive. 

In  this  unfortunate  course  of  development,  but  two 
periods  of  mitigation  occur.  Walpole's  long  peace  ad- 
ministration ([722-39),  secured  the  carrying  of  some 
desirable  reforms ;  such  as  the  abolition  of  the  general 
export  duty,  the  reduction  of  the  more  onerous  duties  on 
raw  materials,  and  the  adoption  of  a  new  valuation  of 
goods.  The  opening  of  the  younger  Pitt's  ministry  also 
promised  well.  The  duties  on  tea  and  coffee  were  lowered 
(1784);  the  Eden  commercial  treaty  with  France  (1786), 

1  Dowell,  i.  195  ;  ii.  34.  Some  of  the  hottest  contests  between  the  king  and 
the  people  turned  on  questions  of  taxation,  e.  g.  the  currant  duty  (Bates'  case). 
For  the  earlier  history,  see  Hall,  History  of  the  Customs  Revenue. 


CHAP.  VII.]  CUSTOMS  DUTIES.  497 

enabled  an  open  trade  to  be  carried  on  between  the  two 
countries  ;  and  in  1787  the  customs  laws  were  consolidated. 
These  measures,  however,  had  but  a  temporary  effect ;  the 
need  of  securing  revenue  made  recourse  to  bad  taxes 
necessary,  when  the  productiveness  of  the  better  ones  was 
exhausted.  But  from  the  fiscal  point  of  view  it  is  plain 
that  a  simpler  and  better-regulated  system  would  have 
been  far  more  effective.  In  spite  of  the  oppressive  duties 
on  almost  every  article,  and  the  frequent  increases  of  rates, 
the  returns  were  not  what  might  have  been  expected.  In 
1739  the  yield  was  less  than  in  1702,  and  the  growth  up 
to  the  accession  of  George  III.  was  slow 1. 

In  the  period  1820-1860,  this  complicated  and  un- 
economic tariff  system  was  completely  transformed.  The 
old  prohibitive  duties  were  removed  ;  so  were  all  the 
surviving  export  taxes.  Raw  materials,  articles  of  food, 
and  finally,  manufactured  goods  disappeared  from  the 
customs  list,  until  the  attention  of  the  customs  staff  was 
concentrated  on  a  small  number  of  productive  articles, 
taxed  at  suitable  rates.  Thus  the  customs  system  has 
become  nearly  as  simple  as  the  excise,  though  owing  to 
the  conditions  of  production  it  at  present  includes  some- 
what more  articles.  Notwithstanding  this  notable  diminu- 
tion in  the  number  of  dutiable  goods,  the  yield  has  hardly 
declined,  and  by  the  replacement  of  a  moderate  sugar 
duty  would  now  be  higher  than  ever  2.  We  are  not  con- 
cerned here  with  the  history  of  this  important  reform, 

1  The  following  figures  give  the  yield  of  the  customs  at  selected  periods  : — 

Year.  £ 

1702  1,500,000 

1739  1,400,000 

1760  1,824,000 

1784  3,025,000 

1802  8,815,000 

1816  11,950,000. 

Sinclair,  History  of  Revenue,  ii.  Appendix,  No.  i.;  Dowell,  ii.  62,  109; 
Wilson,  National  Budget,  55. 

3  In  1872  the  low  sugar  duty  gave  £3,180,000  ;  allowing  for  the  increase  in 
consumption,  the  same  rate  would  bring  the  present  customs  to  over .£24, 000,000. 

Kk 


498  PUBLIC   FINANCE.  [BOOK  IV. 

carried  out  in  more  logical  and  consistent  manner  than 
is  usual  in  English  legislation1.  Still  less  have  we  to 
consider  the  economic  issues  of  the  free-trade  contest ; 
but  it  is  in  place  to  note  the  real  cause  of  the  financial 
success  achieved.  It  was  by  singling  out  the  fiscal  element 
in  import  duties  and  neglecting  other  considerations,  that 
the  revenue  was  maintained  so  close  to  its  former  level. 
The  great  number  of  duties  created  or  increased  between 
the  Revolution  of  1688  and  the  battle  of  Waterloo  had 
two  grave  financial  defects,  for  (i)  they  were  not  really 
productive  of  revenue2,  and  (2)  they^olatecTthe  rule^f 
' economy5  by  taking  far  more  out  of  the  taxpayers^ 
pockets  than  they  provided  for  the  state  Treasury.  The 
successive  prunings  of  the  customs  tariff  removed  what  had 
little  life,  and  gave  room  for  growth  to  the  branches  that 
remained.  Cheaper  raw  materials  made  industry  more 
effective  ;  cheaper  food  left  a  larger  surplus  to  be  spent  on 
enjoyments,  and  lower  duties  on  the  productive  articles 
stimulated  consumption,  while  they  diminished  smuggling. 
Consequently  there  has  been  an  apparently  immense  re- 
mission of  duties  without  any  real  loss  to  the  revenue3. 
It  must,  however,  be  remembered  that  the  low  rates  of  duty 
now  prevailing — those  on  tobacco  and  spirits  excepted — 
are  dependent  on  the  development  of  direct  taxation,  and 
the  stamp  (including  the  succession)  duties.  The  emer- 

1  There  were  three  stages  in  the  movement,  viz.  (i)  the  reforms  of  Huskisson, 
1823-7,  which  opened  the  way ;  (2)  Peel's  tariffs  of  1842  and  1845,  by  which  a 
substantial  instalment  of  free  trade  was  given ;  and  (3)  the  measures  of 
Mr.  Gladstone  in  1853  and  1860,  which  completed  the  work.  For  the  fiscal 
history  of  this  period,  see  Dowell,  ii.  249-361 ;  Buxton,  Finance  and  Politics, 
i.  1-217;  also  Northcote,  Twenty  Years  of  Financial  Policy.  For  the  general 
character  of  the  legislation,  Wagner,  iii.  300-1. 

3  Thus  in  1839  crystal  beads  yielded  is.  >jd.,  starch  is.  ^d.,  Bruges  thread 
is.  $d.,  extract  of  vitriol,  12s.  $d\ 

3  Between  1815  and  1885  the  amount  of  duties  remitted  was  ^"35,861,000 
against  ^8,063,000  imposed,  or  a  balance  of  ^"27,800,000  remitted,  Wagner, 
iii.  299.  But  there  have  been  no  remissions  in  the  last  ten  years  of  the  period, 
and  those  in  the  preceding  fifteen  years  (1861-75)  amounting  to  ^14,500,000, 
were  on  purely  revenue  duties — tea,  sugar,  &c.  Since  1885  the  tea,  tobacco, 
and  currant  duties  have  been  lowered. 


CHAP.  VII.]  CUSTOMS   DUTIES.  499 

gency  of  a  war  or  any  weakness  in  the  treatment  of  the 
income-tax  would  lead  to  higher  rates  on  wine,  tea,  and 
coffee,  and  a  return  to  the  sugar  duty. 

As  regards  the  particular  objects  of  charge,  the  chief 
difference  from  the  excise  lies  in  the  fact  that  certain 
exclusively  foreign  products  are  taxed.  Tea,  coffee,  figs, 
raisins,  currants,  and  wine  are  not  British  products,  a 
position  that  fiscal  regulations  have  also  given  to  tobacco. 
Hence  these  commodities  are  contributories  to  the  customs 
only.  Beer  and  spirits  come  under  both  departments. 
An  important  development  in  fiscal  expedients  has  led  to 
what  is  practically  a  connexion  between  the  two  branches. 
The  bonding  or  warehousing  system,  by  which  goods  can 
be  landed  and  stored  free  of  duty,  if  they  are  placed  under 
official  control,  is  extensively  used,  and  is  now  available  in 
several  inland  towns,  with  the  result  that  customs  and 
excise  become  practically  intermingled.  Of  the  advantage 
of  this  concession  it  is  needless  to  speak,  but  it  is  found 
rather  difficult  to  extend  it  as  far  as  traders  desire,  owing 
to  the  extra  cost  that  it  causes1.  At  all  events,  the 
sacrifice  imposed  on  traders  and  on  the  community  is 
minimised  by  this  means,  especially  when  the  very  small 
number  of  dutiable  articles  is  taken  into  consideration. 

The  bulk  of  the. customs  revenue  is  made  up  of  drink 
and  tobacco  duties,  the  former  giving  £4,800,000,  the  latter 
£9,500,000  in  the  year  1890-1.  Tea  is  the  only  other 
large  contributor.  At  the  reduced  rate  of  ^d.  per 
pound  it  yielded  £2,400,000.  but  a  continuance  of  the 
normal  increase  of  the  last  few  years  in  the  other  branches 
of  the  revenue  would  allow  of  its  repeal,  along  with  the 
smaller  duties  on  coffee,  cocoa,  chicory,  and  dried  fruits. 
Were  this  accomplished,  the  whole  indirect  taxation  of 
consumption  in  the  United  Kingdom  would  be  confined  to 
drink  and  tobacca,  as  90  per  cent,  of  it  is  at  present. 

§  4.  France,  on  the  whole,  shows  a  greater  difference 
from  England  in  Customs  (Douanes)  than  in  internal 

1  On  the  bonding  system,  cp.  Cliffe  Leslie,  Financial  Reform,  199,  214-6. 

K  k  2 


5<X)  PUBLIC   FINANCE.  [BOOK  IV. 

taxation.  Not  only  are  the  dutiable  articles  much  more 
numerous,  but  the  aim  of  gaining  revenue  has  never  been 
the  sole  end  in  view.  To  reach  the  position  of  England,  an 
entire  recasting  of  the  tariff  would  be  necessary.  All  the 
points  in  which  reform  was  carried  out  in  the  latter 
country  remain  for  treatment.  Food,  raw  materials,  and 
manufactures  are  all  subject  to  import  duties,  often  high 
in  amount.  The  development  of  this  system  can  be  traced 
from  the  sixteenth  century,  but  its  most  striking  period 
was  under  the  administration  of  Colbert  (1661-1683), 
when  the  old  export  and  transit  dues  were  diminished, 
and  the  import  ones  increased,  especially  on  manufactures. 
The  whole  customs  system  was,  however,  affected  by  the 
absence  of  unity,  the  internal  duties  between  the  different 
provinces  being  just  as  heavy,  and  far  more  injurious  to 
trade.  These  obstacles  were  finally  removed  by  the 
Revolution,  and  the  reform  tariff  of  1791,  which  is  the  basis 
of  the  present  structure,  was  established  1.  Unfortunately 
the  liberal  provisions  of  this  measure  were  not  continued  in 
subsequent  legislation.  From  the  outbreak  of  war  in  1792  to 
1860,  political  rather  than  financial  considerations  governed 
the  framing  of  tariffs  in  France.  The  result  is  seen  in  the 
comparatively  small  yield  of  this  form  of  tax.  Instead  of 
the  English  revenue  of  £20,000,000,  obtained  without  any 
direct  pressure  on  the  necessaries  of  life,  or  the  raw  materials 
of  industry,  the  highest  yield  of  the  French  customs  has  not 
reached  £15,000,000,  though  the  list  of  dutiable  articles  is 
a  long  one.  The  smaller  return  may  be  partially  explained 
by  reference  to  the  lower  standard  of  living  in  France,  the 
difficulties  of  supervision,  and  the  different  position  of 
taxed  products,  e.g.  wine  and  tobacco  are  taxed  solely  by 
the  customs  in  England.  On  the  other  hand,  the  duties 
on  salt  and  sugar  give  a  large  part  of  the  receipts,  and 
they  are  not  in  force  in  England.  But  the  full  explanation 
of  the  smaller  return  is  to  be  found  in  the  unproductive 

1  For  Colbert,  see  Clamageran,  ii.  599-697  ;  for  the  internal  customs,  Stounn, 
i.  470  sq.,  and  for  the  tariff  of  1791,  ib.  ii.  61-75. 


CHAP.  VII.]  CUSTOMS   DUTIES.  5<DI 

character  of  so  many  of  the  articles  taxed.  Thus,  out  of  a 
total  yield  of  £13,400,000  in  1887,  but  six  articles  produced 
more  than  £500,000  each,  and  they  made  up  £9,800,000, 
or  nearly  three-fourths  of  the  total,  viz.  coffee  £4,000,000, 
corn  £1,640,000,  sugar  £1,560,000,  petroleum  £1,200,000, 
wine  £900,000,  and  cocoa  £510,000.  All  the  remaining 
goods  produced  only  £3,600,000,  or  £400,000  less  than 
the  single  item  of  coffee,  the  only  fairly  productive  article 
being  coal,  with  £450,000.  Even  of  the  productive  duties, 
those  on  corn  and  petroleum  are  seriously  inconvenient, 
while  the  former  is  an  encouragement  to  the  unprofitable 
occupation  of  wheat-growing.  A  further  proof  of  the 
revenue  being  really  derived  from  a  limited  number  of 
articles,  and  having  its  best  resource  in  them,  appears  from 
the  fact  that  in  1873  the  six  commodities  enumerated  paid 
only  £3,600,000,  or  little  over  one-third  of  their  yield  in 
1887.  Of  these,  coffee  and  cocoa  have  increased  four-fold, 
petroleum  nearly  three-fold,  corn  and  wine  about  eighteen- 
fold,  while  the  return  from  all  other  goods  has  only  risen 
from  £2,200,000  to  £3,600,000,  or  a  little  over  sixty  per 
cent. 1.  The  duties  on  hundreds  of  small  articles  do,  it  is 
true,  help  to  make  the  budget  balance,  but  at  an  excessive 
cost.  A  small  addition  to  the  direct  taxes,  a  readjustment 
of  the  more  productive  duties,  or  some  minor  retrench- 
ments would  be  preferable  methods. 

The  absence  of  any  due  relation  between  the  customs 
and  the  internal  taxes  is  a  further  blot  from  the  financial 
poyit  of  view.  An  import  duty,  uncompensated  by  an  equal 
charge  on  the  corresponding  native  product,  causes  a 
diversion  of  demand  that  is  unprofitable  both  to  the  State 
and  the  consumers.  Regarding  such  a  method  as — what  it 
really  is — a  bounty  on  home  production,  we  can  see  how 
an  unnecessary  cost  is  incurred  through  the  system.  More 

1  The  great  increase  in  the  corn  duties  is  due  to  the  return  to  agricultural 
protection  by  the  laws  of  1881  and  1885 ;  that  in  wine  to  the  failure  of  the 
French  crops  and  the  consequent  importation.  There  is,  however,  a  falling-off 
in  sugar  of  ^350,000  that  could  have  been  easily  avoided  by  wiser  treatment  of 
the  bounty  question. 


502  PUBLIC   FINANCE.  [BOOK  IV. 

particularly  is  this  true  of  the  duties  on  raw  materials,  such 
as  the  various  yarns,  and  on  machinery  and  implements. 
Though  such  taxes  have  little  direct  financial  significance, 
they  do  much  to  dry  up  the  source  of  all  taxation  by 
retarding  the  development  of  industry  and  the  growth  of 
commerce. 

While  then  the  French  customs  could  hardly  be  as 
productive  as  the  English  with  their  duties  on  tea,  tobacco, 
wine  and  foreign  spirits,  they  might  yield  a  satisfactory 
contribution  of  at  least  £10,000,000,  or  probably  more,  by 
duties  concentrated  on  a  small  number  of  commodities, 
and  this  revenue  would  further  be  steadily  increasing  as 
the  relief  to  industry  from  the  other  remissions  came  to 
operate 1. 

§  5.  The  Italian  customs  system,  with  its-jcosiparatively 
brief  history,  shows  the  same  faults  and  illustrates  the  same 
general  principles  as  the  French  one.  From  less  than 
£2,500,000  in  1862,  the  return  has  grown  to  £10,500,000  in 
1889-90,  but  this  increase  is  due  to  the  imposition  of  much 
higher  rates  of  duty,  which  are  very  heavy  on  raw  materials 
and  necessaries.  Still  the  productive  articles  are  few  in 
number.  In  1883,  sugar,  mineral  oils,  and  coffee  con- 
tributed more  than  half  (53  per  cent.)  of  the  total,  or 
£3,200,000  out  of  £6,000,000.  Since  then,  by  heavier  rates 
on  yarns,  tissues  and  metals,  the  customs  revenue  has  been 
brought  up  to  its  present  point,  with,  however,  a  very  severe 
pressure  on  the  consumers  generally,  which,  be  it  said,  is 
only  in  keeping  with  the  general  system  of  Italian  taxation. 
Reform  therefore  is  not  so  easy  as  it  would  be  in  France ; 
the  high  duties  bring  in  a  much  needed  revenue,  and 
remissions  of  taxation  are  not  likely  to  be  compensated 
by  rapid  recovery  through  increased  consumption  2. 

The  German  system  is  specially  interesting  as  supply- 

1  The  exaggerations  of  the  protectionist  system  by  the  tariff  of  1891  will,  it 
is  estimated,  add  ^£2, 800,000  to  the  receipts,  but  this  is  a  very  insufficient 
measure  of  the  real  cost  that  will  be  placed  on  the  country. 

2  On  the  Italian  customs,  see  the  elaborate  study  by  Alessio,  ii.  346-452. 


CHAP.  VII.]  CUSTOMS   DUTIES.  503 

ing  one  of  the  best  possible  examples  of  the  gradual 
absorption  of  smaller  customs  areas  in  a  common  unity. 
The  condition  of  the  German  States,  each  with  distinct 
custom-houses  that  were  so  many  obstructions  to  trade, 
led  the  wiser  financiers  to  promote  the  establishment  of 
fiscal  unions  between  the  States.  These  efforts  brought 
about  the  series  of  agreements  by  which  the  Zollverein,  or 
customs  union,  was  created,  which  included  Prussia,  Bavaria, 
Wiirtemberg,  Saxony,  Baden,  and  most  of  the  smaller 
territories,  and  which  was  the  forerunner  of  political  union. 
The  immediate  effect  of  the  removal  of  internal  restrictions 
was  an  increase  in  customs  receipts,  and  a  reduction  of  the 
proportionate  cost  of  collection  by  one-half.  The  moderate 
rates  of  duty,  derived  from  the  Prussian  tariff  of  1818, 
assisted  this  expansion,  which  was  hardly  checked  by  some 
partial  protectionist  movements. 

The  customs  union  when  transformed  into  the  German 
empire  at  first  continued  its  moderate  financial  system,  and 
even  (1873)  made  further  reductions.  But  the  need  of 
revenue  and  the  stronger  protectionist  sentiment  brought 
about  a  much  higher  scale  of  duties  in  the  tariff  of  1879. 
That  this  important  measure  increased  the  receipts  is 
indisputable;  from  £5,700,000  in  1878-9  they  rose  to 
£13,500,000  ten  years  later.  Whether  the  mode  adopted 
was  the  best  one  is  not  so  clear.  The  corn  duties,  as  in 
France  and  Italy,  press  on  the  working  class,  and  owing 
to  the  large  home  production  are  decidedly  uneconomic. 
The  cattle  duties  have  not  even  the  advantage  of  yielding 
revenue.  Still  more  objectionable  are  the  taxes  on  wood, 
iron,  and  machinery  in  consequence  of  their  effects  on 
industry. 

The  limitation  of  the  productive  articles  to  a  small 
number  is,  as  we  saw,  also  found  in  Germany.  If  corn, 
coffee,  tobacco  and  wine,  were  removed  from  the  tariff, 
more  than  half  of  the  revenue  would  disappear ;  and  it  is 
more  than  probable  that  a  reform  of  the  duties  on  these 
articles,  accompanied  by  an  adjustment  of  the  inland  taxes 


504  PUBLIC  FINANCE.  [BOOK  IV. 

on  commodities,  would  allow  of  a  great  curtailment,  if  not 
an  entire  removal,  of  the  remaining  items l. 

The  tariff  systems  of  Austria,  Russia,  and  the  United 
States  are  even  more  remarkable  for  their  subordina- 
tiojCL0£-financial  to  political  objects.  Under  the  influence 
of  a  protectionist  policy  the  revenue  duties  on  tea,  coffee 
and  sugar  have  in  the  last-named  country  been  either 
abolished  or  cut  down  to  a  very  low  amount,  while  the 
duties  on  raw  materials  and  manufactures  are  many  and 
high.  There  is  no  approach  to  equality  between  the 
inland  taxation  and  the  customs  tariff;  on  the  contrary  the 
duties  are  designedly  fixed  so  as  to  give  a  preference  to 
native  producers. 

§  6.  The  broad  result  of  an  examination  of  the  customs 
systems  of  different  countries  is  to  indicate  that  the  financial 
operations  are  greatly  interfered  with,  and  their  effectiveness 
diminished,  by  the  intrusion  of  politico-economic  objects. 
We  may  indeed  conveniently  divide  import  duties  into  two 
classes :  (i)  the  small  number  that  contribute  to  the 
revenue  in  a  satisfactory  way,  and  (2)  the  far  larger  number 
that  only  provide  income  as  it  were  incidentally.  The 
protective  duties  of  modern  societies  are  in  fact  often 
rather  a  mode  of  expenditure  than  of  revenue,  since  by  the 
increased  cost  of  collection  that  they  make  requisite,  and 
by  their  indirect  effects  on  the  financial  duties,  they  take 
more  from  the  Exchequer  than  they  bring  in  to  it.  The 
line  is  not  always  clearly  drawn  ;  the  same  duty  may  be  at 
once  revenue  and  protective,  as  the  French  and  German 
corn  duties  prove  ;  but  this  situation  really  indicates  either 
that  the  protection  given  is  ineffectual,  or  that  a  great  deal 
of  the  tax  is  wasted  on  the  virtual  bounty  given  to  the 
home  producers.  Whatever  view  we  jmay  take~~o£_ the 
wisdom  of  a  protective  policy,  we  must  allow  that  it  meansL 
a  certain  outlay  on  the  part  of  the  State  by  the  sacrifice  of 
what  would  otherwise  have  gone  to  increase  the  revenue. 

1  For  the  founding  of  the  Zollverein,  see  Roscher,  §  102;  also  his  Geschichte, 
ch.  34,  and  for  the  present  German  customs,  Cohn,  §§  404-10. 


CHAP.  VII.]  CUSTOMS  DUTIES.  505 

Another  noticeable  feature  is  the  almost  exclusive  use  of 
import  duties.  Transit  dues  have  been  completely  aban- 
doned 1,  and  export  duties  have  a  very  subordinate  place. 
They  do  not  exist  in  Great  Britain,  France,  Germany,  or  the 
United  States,  and  may  be  said  to  be  confined  to  countries 
at  a  lower  stage.  Brazil  has  a  productive  duty  on  the 
export  of  coffee,  but  India  takes  the  foremost  position  with 
its  opium  and  rice  duties.  Some  of  the  English  Colonies 
also  levy  duties  on  the  export  of  their  staple  product,  e.g. 
sugar  in  the  case  of  the  West  Indian  Islands  2.  But  these 
exceptional  cases  only  tend  to  confirm  the  rule  that  for  the 
present  time  imports  are  the  most  effective  object  of 
taxation.  Nor  is  it  hard  to  see  the  reasons  that  have  made 
them  preferred.  The  excise  taxation  of  commodities 
almost  necessarily  carries  with  it  the  use  of  corresponding 
duties  on  imports,  and  some  imported  articles  are  very 
suitable  objects  for  imposition.  Hence  their  employment 
for  revenue  purposes.  The  desire  to  encourage  native 
industry  accounts  for  the  duties  on  many  articles  that  are 
very  decidedly  unfit  to  be  taxed,  and  especially  for  the  use 
of  import  duties  with  respect  to  them.  We  may  indeed  trace 
a  general  movement  by  which  the  transit  duty  has  been 
abandoned,  and  the  once  prevailing  export  taxes  reduced 
to  insignificance,  while  the  import  tax  comes  to  the  front. 

There  is  a  further  movement  in  respect  to  the  customs 
system  that  is  deserving  of  notice,  viz.  its  extension  over,  or 
application  to,  wider  areas.  The  case  of  Germany  has  been 
mentioned,  but  France  in  the  last  century,  Italy  in  the 
present  one,  and  even  the  United  Kingdom  are  additional 
instances  3.  It  is  not  likely  that  no  further  advance  will  be 

1  The  Indian  transit  duties — the  most  important  of  which  was  that  on 
Cashmere  wool  (10  per  cent.) — were  abolished  by  Mr.  James  Wilson :  see  his 
Financial  Statement  (1860),  22.  But  part  of  the  opium  revenue  is  really  a 
transit  charge  on  the  drug  from  the  native  states. 

3  The  Indian  opium  duty — partly  monopoly,  partly  transit — yielded  84,500,000 
rupees  in  1880-1,  but  has  sunk  to  53,100,000  rupees  in  the  estimate  for  1891-2. 
The  Brazilian  coffee  duty  gave  ^1,800,000  in  1889. 

3  The  English  customs  system  was  extended»*e-Scotlanti-iji>i7o7,  but  not  to 


506  PUBLIC   FINANCE.  [BOOK  IV. 

made  in  this  respect.  Proposals  for  customs  unions  of 
Australasia,  of  the  British  Empire,  of  central  Europe  and 
of  all  the  American  nations,  however  they  may  differ  in 
practicability,  are  all  signs  of  the  times,  and  show  the 
direction  in  which  change  is  probable.  To  understand  the 
real  meaning  of  this  tendency  it  is  well  to  reassert  a  point 
previously  noticed,  viz.  that,  financially  considered,  customs 
duties  are  but  one  form  of  the  taxation  of  commodities, 
and  that  therefore  the  formation  of  a  customs  union  is 
pro  tanto  the  substitution  of  excise  for  customs.  How  far 
this  method  can  be  carried  at  present  is  not  easily  de- 
terminable,  but  it  may  be  suggested  that  ultimately  the 
boundary  duties  on  imports  will  share  the  fate  of  those  on 
the  export  and  transit  trades.  The  taxation  of  goods  at 
the  frontier,  in  spite  of  the  improvements  in  the  mechanism 
of  collection,  is  a  serious  obstruction  to  trade,  especially 
under  modern  conditions  in  which  rapidity  and  despatch 
are  of  such  great  importance.  Just  as  the  town  octrois 
would  be  intolerable  in  England  or  America,  so  it  may 
come  to  pass  that  a  customs  line  between  England  and 
France  will  be  too  inconvenient  to  be  endured.  For  the 
immediate  future,  however,  the  customs  system  will  be  a 
necessary  element  in  the  taxation  of  commodities  that  the 
heavy  outlay  of  rn^lern  States  makes  indispensable. 

§  7.  The  problem  *of  jncidencc — always  a  difficult  one — 
is  specially  involved  In  the  case  of  taxation  of  foreign 
trade.  The  various  parties  affected  and  the  conditions  that 
govern  the  course  of  unimpeded  trade,  which  are  them- 
selves complicated,  must  be  taken  into  account  before  a 
full  interpretation  can  be  given ;  it  is,  besides,  very  hard 
to  obtain  confirmation  or  correction  of  the  results  of 
deductive  reasoning  by  appeal  to  statistics,  as  they  do 
not  throw  much  light  on  the  really  difficult  parts  of  the 
subject. 

To  begin  with  the  most  primitive  form.     Who  pays  the 

Ireland  till  1825,  when  the  Union  duties  were  repealed.    At  present  the  Channel 
Islands  are  outside  it,  and  the  Isle  of  Man  is  under  special  regulations. 


CHAP.  VII.]  CUSTOMS   DUTIES.  507 

cost  of  a  transit  duty  ?  According  to  Adam  Smith  c  duties 
of  this  kind  are  paid  altogether  by  foreigners,  and,  perhaps, 
are  the  only  duties  that  one  State  can  impose  on  the 
subjects  of  another,  without  obstructing  in  any  respect  the 
industry  or  commerce  of  its  own1.'  The  loss  must,  he 
supposes,  fall  on  the  sending  or  the  receiving  country. 
This  view,  however,  needs  qualification.  A  transit  duty 
will  force  trade  to  take  another  direction,  or  if  this  is  im- 
possible will  reduce  its  volume,  and  thereby  injuriously 
affect  the  transport  industry  and  the  entrepot  business. 
For  example,  a  transit  duty  in  Belgium  would  be  disastrous 
to  the  railways  of  that  country  and  to  the  depot  business 
of  Antwerp.  If  we  recognise  that  a  transit  duty  is  an 
import  tax  without  a  drawback  on  export,  we  see  at  once 
that  it  is  unadvisable  for  the  same  reason  that  drawbacks 
have  been  universally  adopted  2. 

The  export  duty  is,  generally  speaking,  open  to  similar 
objections.  As  employed  in  mediaeval  times,  it  was  in- 
tended partly  to  tax  those  foreigners  who  used  the  staple 
product  of  the  country,  and  partly  as  an  impost  on  the 
producers,  or  owners  of  natural  agents.  It  is  evident  that 
the  incidence  of  the  tax  will  vary  according  to  the  position 
of  the  article  taxed.  That  the  home  traders  will  try  to 
raise  the  price  is  certain,  but  their  success  in  this  endeavour 
will  depend  on  (i)  the  extent  to  which  outside  competition 
is  possible,  and  (2)  the  need  that  foreigners  have  for  the 
article.  Where  several  sources  of  supply  exist,  the  effect  of 
taxing  one  will  be  to  turn  demand  to  the  others,  and  where 
increased  price  checks  demand,  it  tends  to  bring  about  a 
fall.  Thus  it  may  be  said  that,  in  most  cases,  an  export 
duty  is  chiefly  paid  by  the  country  that  imposes  it.  Unless 
the  country  has  a  complete  monopoly  of  the  product,  and 
the  foreign  demand  remains  unaffected  by  a  rise  of  price, 
the  whole  burden  cannot  be  transferred  to  the  consumers. 

1  Wealth  of  Nations,  379. 

2  The  abolition  of  the  Indian  transit  dues  was  for  the  object  of  stimulating 
through  trade.     Wilson,  ut  sup.  22. 


508  PUBLIC   FINANCE.  [BOOK  IV. 

This  case  is,  it  need  not  be  said,  rarely  found  \  but  any  ap- 
proximation to  it  will  partly  pass  the  tax  to  the  foreign 
consumers.  Still  as  a  practical  result,  the  bulk  of  the  duty 
falls  immediately  on  the  producers  of  the  taxed  product, 
though  it  may  be  shifted  by  them  to  the  owners  of  land, 
skilled  labour,  or  fixed  capital  concerned  in  the  business. 
A  large  number  of  export  duties  might  even  by  diminish- 
ing foreign  trade  lower  the  rates  of  wages  and  interest 
generally. 

The  effects  of  an  import  duty  have  to  be  judged  on  the 
same  principles.  The  usual  incidence  will  be  on  the  con- 
sumers of  the  commodity,  but  where  no  other  market  is 
open  to  the  foreign  producer  and  where  any  increase  of 
price  arrests  demand,  the  burden  of  the  tax  will  be  trans- 
ferred to  the  producing  country,  with  of  course  the  same 
ulterior  effects  as  those  found  in  respect  to  export  duties. 
It  is  also  true  that  such  a  case  is  hardly  in  existence.  The 
foreign  producer  has  other  markets,  and  demand  is  not 
often  so  sensitive ;  besides  there  is  always  the  possibility 
of  transferring  labour  and  capital  to  other  employments, 
should  the  pressure  be  sufficiently  severe  2. 

The  preceding  considerations  suggest  that  it  is  possible, 
in  some  instances,  to  place  the  weight  of  taxation  on 
foreigners,  and  thus  to  levy  what  is  substantially  a  tribute 
•from  them ;  but  they  also  show  that  the  probability  of 
success  in  any  design  of  the  kind  is  very  slight.  It  is 
further  to  be  noticed  that  it  is  through  revenue  duties  only 
that  any  advantage  of  the  kind  can  be  gained ;  a  protective 
duty,  if  effective,  brings  in  little  or  no  revenue.  That  such 
duties  are  injurious  to  foreign  countries  is,  we  believe,  un- 
questionable, but  they  are  as  certainly  not  advantageous  to 
the  revenue  of  the  nation  that  imposes  them.  The  corn 
duties  of  France  and  Germany  may  perhaps  somewhat 

1  Wool  in  mediaeval  England  and  opium  in  India  at  present  have  been  given 
as  examples,  but  the  latter  is  undoubtedly  open  to  some  competition. 

2  For  further  discussion  of  this  question,  see  Brit.  Assoc.  Report,  1889, 
440-48,  also  cp.  Bk.  iii.  ch.  5. 


CHAP.  VII.]  CUSTOMS  DUTIES.  509 

reduce  the  demand  for  Russian  and  American  corn,  and 
thus  lower  the  price  obtained  by  those  countries,  just  as 
the  English  tea  duty  may  have  in  part  been  paid  by  the 
Chinese  ;  but  in  the  former  instance  a  corresponding  excise 
duty  on  corn,  if  practicable,  would  add  far  more  to  the 
revenue  with,  on  the  whole,  less  sacrifice l. 

A  study  of  the  question  of  incidence  in  relation  to 
customs  duties,  therefore,  leads  to  the  conclusion,  that  while^ 
their  real  operation  is  often  complicated  and  difficult  to 
JollowTthe  main  burden  falls  on  the  country  that  imposes 
them,  and  that  it  can  hardly  ever  hope,  even  if  it  should 
so  desire,  to  shift  any  substantial  part  of  its  taxation  to. 
another  nation  or  nations.  On  the  whole  the  duties  on 
imports  must  be  regarded  in  common  with  the  excise  and, 
where  it  exists,  state  monopoly,  as  one  part  of  the  system 
for  taxing  the  consumption  of  wealth. 

1  For  the  corn  duties,  Wagner,  ii.  359,  367;  Conrad,  art.  'Landwirthschaft' 
in  Schonberg,  ii.  247-260;  for  tea,  Senior,  PoL  EC.  184. 


CHAPTER  VIII. 

TAXES  ON  COMMUNICATIONS,  ACTS  AND  SUCCESSIONS. 

§  1.  WHEN  considering  the  system  of  taxation,  we  recog- 
nised that,  in  addition  to  the  primary  taxes  levied  on  the 
income  of  the  contributors  and  those  secondary  imposts 
affecting  the  consumption  of  commodities,  there  remained 
a  large  group  of  charges  not  to  be  placed  under  either 
category.  Communications,  transfers  of  property,  inherit- 
ances, and  legal  transactions  have  all  been  made  to  supply 
a  part  of  the  State's  revenue 1.  The  principles  on  which 
this  part  of  the  tax  system  should  be  based,  and  the  justi- 
fication for  its  employment,  have  also  been  briefly  noticed  ; 
but  there  can  be  no  doubt  that  very  different  elements  have 
assisted  in  its  establishment.  There  is,  first,  the  close 
resemblance  of  some  of  the  objects  taxed  to  commodities. 
A  charge  on  transport  is  very  like  a  duty  on  goods  trans- 
ported, and  the  same  close  connexion  exists  in  such  cases 
as  the  advertisement  and  newspaper  taxes  :  they  might  be 
called  c  taxes  on  quasi-commodities.'  Another  contributing 
agency  is  the  '  fee '  system.  Some  of  the  taxes  on  acts  are 
but  extensions  of  fees  paid  for  service  rendered.  Land 
transfer  and  other  judicial  acts  require  the  intervention  of 
state  officials,  for  whose  services  a  charge  may  be  fairly 
made,  and  these  payments  are  easily  developed  into  taxes. 
In  like  manner,  the  economic  receipts  from  public  industry 
or  possessions  may,  through  the  use  of  monopoly,  be  carried 
to  a  point  at  which  they  become  in  part  taxation.  Older 
perhaps  than  any  of  the  foregoing  is  the  effect  of  the 

1  See  Bk.  iii.  ch.  i.  §§  n,  12 ;  ch.  4.  §  10. 


CHAP.  VIII.]  TAXES   ON   COMMUNICATIONS.  511 

sovereign's  prerogative  rights.  That  general  power  over  the 
subject's  property,  whether  expressed  in  the  feudal  forms, 
or  in  the  older  idea  of  dominium  eminens,  issued  in  duties 
on  the  transmission  of  possessions  from  the  dead  to  the 
living,  as  well  as  in  the  case  of  transfers  inter  mvos.  The 
fact  that  all  these  elements  contributed  towards  the  creation 
of  the  taxes  under  consideration,  and  supply  the  historical 
interpretation  of  their  existence,  does  not  in  the  least  affect 
the  positions  that  at  present  the  true  legal  ground  of  such 
charges  is  to  be  found  in  the  legislative  power  of  the  State, 
and  that  their  financial  justification  depends  on  the  place 
they  hold  in  the  tax-system.  A  valid  defence  can  be  only 
based  on  their  being  conducive  to  the  ends  of  economy, 
equity,  and  productiveness,  and  it  was  in  that  light  that  we 
admitted  their  legitimacy  under  present  conditions. 

§  2.  The  first  of  the  sub-classes  in  this  part  of  the  tax- 
system  is  that  levied  on  communications  and  transport. 
The  most  conspicuous  part  of  the  revenue  derived  by  the 
State  from  this  source  has  been  already  considered  in 
connexion  with  the  industrial  domain.  Post  offices  and 
railways  are  apparently  contributors  to  the  economic  rather 
than  to  the  tax  revenue.  Nevertheless,  it  is  possible  to 
find  in  some  cases  a  tax-element  in  such  receipts.  At 
present,  the  net  earnings  of  the  English  Post  Office  are 
declared  to  be  ,£3,450,000,  and  of  this  amount  the  far 
greater  part,  perhaps  the  whole,  is  obtained  from  corre- 
spondence. The  rates  for  circulars  and  newspapers  are  not 
fixed  on  a  profitable  scale.  It  therefore  follows  that  the 
excess  of  postal  revenue  over  expenditure  is  a  tax  on 
ordinary  and  commercial  letter-writers,  but  one  of  a  very 
moderate  nature,  though  it  is  not  easy  to  estimate  the 
check  that  a  penny  as  against  a  half-penny  rate  gives  to 
trade.  Regarded  as  a  tax  diffused  over  the  community,  it  is 
on  the  whole  defensible,  though  the  tendency  to  insist  that 
the  postal  profits  shall  be  devoted  to  improving  the  service 
is  already  becoming  more  pronounced.  That  England, 
with  its  dense  population  and  high  industrial  development, 


PUBLIC   FINANCE.  [BOOK  IV. 

is  very  favourably  situated  for  cheap  postal  working  is 
undoubtedly  true.  Other  countries  have  very  little  postal 
surplus  to  deal  with  ;  their  difficulty  rather  consists  in 
keeping  up  sufficient  receipts  to  balance  expenditure. 

The  Prussian  state  railways  have  been  in  an  analogous 
position  to  the  English  Post  Office.  Such  high  net  receipts 
as  they  have  obtained  could  hardly  be  due  to  superior 
management:  they  rather  suggest  unduly  high  rates  or 
inefficient  railway  service,  and  i'n  the  latter  respect  there 
appears  to  be  reason  for  complaint 1.  A  slight  reduction  in 
train  service  or  delay  in  delivery  of  goods  may  reduce  the 
cost  of  working,  but  proves  very  expensive  and  inconvenient 
for  traders.  For  reasons  stated  before2,  it  is  not  likely 
that  taxation  of  this  kind  will  continue.  The  railway 
service,  when  under  public  management,  will  usually  tend 
to  be  worked  simply  to  cover  its  cost,  or  on  the  'fee' 
rather  than  the  '  tax '  principle. 

In  countries  where  the  railway  system  is  left  to  private 
enterprise  the  question  of  taxation  takes  a  different  form. 
The  companies  appear  as  the  possessors  of  land,  buildings, 
and  rolling  stock,  as  well  as  the  recipients  of  income,  and 
they  (i.e.  their  shareholders)  will  naturally  be  taxed  for 
both  general  and  local  purposes.  Thus  the  English  local 
rates  and  the  income-tax  apply  to  them.  Many  American 
States  employ  a  special  Corporation  tax  on  railroads.  But 
these  charges  can  hardly  be  regarded  as  falling  on  transport, 
though  the  last-mentioned  has  in  some  degree  that  effect. 
Nearer  to  our  present  subject  are  the  English  passenger 
duty  and  the  French  taxes  on  the  transport  of  goods  and 
passengers.  The  former,  which  is  a  kind  of  descendant  of 
the  duty  on  stage  coaches,  used  to  consist  of  five  per  cent, 
of  the  gross  receipts  from  passengers,  but  by  a  series  of  abate- 
ments and  exemptions  its  yield  has  been  lowered  from 
£810,000  to  £320,000,  or  more  than  half.  The  French 
taxes  imposed  after  the  war  of  1871,  have  been  removed 

1  See  Foxwell  and  Farrer,  Express  Trains,  118  sq. 

2  Bk.  ii.  ch.  3.  §§  14,  19. 


CHAP.  VIII.]  TAXES   ON   COMMUNICATIONS.  513 

from  goods  of  slow  carriage,  but  are  still  levied  on  express 
goods  at  five  per  cent.,  and  on  passengers  at  a  very  high 
rate  (over  twenty-three  per  cent.).  For  1890,  the  receipts 
come  to  ^"3,210,000,  or  about  ten  times  the  English  ones. 
Several  of  the  American  state  taxes  on  railways  are  based 
either  on  the  net  or  gross  earnings  of  the  lines  ;  the  latter  is 
plainly  the  English  passenger  tax  in  a  more  comprehensive 
form. 

The  questions  connected  with  the  incidence  of  this  kind  of 
taxation  are  somewhat  complex.  At  first  it  might  appear 
that  the  tax  would  simply  be  added  to  the  passenger  fares 
or  goods  rates,  and  would  therefore  fall  on  the  travellers, 
or  in  the  case  of  goods  on  the  dealers,  and  finally  through 
them  on  the  consumers.  On  the  other  hand,  it  has  been 
pointed  out  that  railway  rates  and  fares  are  not  fixed  by 
cost  of  service,  but,  on  the  principle  of  all  monopolies,  so  as  J 
to  get  the  maximum  net  return.  Consequently,  the  rates 
being  already  at  their  highest  profitable  point  will  not  bear 
any  further  increase,  and  a  tax  on  transport  will  be  really  ) 
a  tax  on  railway  dividends 1.  The  latter  view,  however,  as- 
sumes too  easily  the  absolute  monopoly  of  railway  business, 
and  also  that  rates  are  in  all  cases  placed  at  the  point  of 
maximum  profit.  The  legal,  and  still  more  the  moral, 
limits  on  the  power  of  railway  managers  cannot  be  ignored, 
and  they  would  compel  at  least  the  sharing  with  the  users 
of  the  service  of  any  gain  obtained  by  the  railways,  as  they 
would  permit  an  increase  in  cases  of  new  taxation.  In 
countries  where  railway  construction  is  still  active,  a  tax 
as  heavy  as  that  in  France  would  tend  to  check  the  opening 
of  fresh  lines,  and,  therefore,  in  the  shape  of  diminished 
railway  accommodation,  fall  on  the  community.  Every- 
where the  hindrance  to  fresh  outlay  would  have  the  same 
effect,  but  in  a  less  degree.  Thus,  there  is  no  reason  to 
doubt  that,  with  the  high  guaranteed  dividends  of  the 
French  railway  companies,  the  tax  on  transport  is  shifted 
from  them  to  the  passengers  and  senders  of  goods,  and  in 

1  Sidgwick,  Pol.  EC.  574  ;  Fawcett,  Pol.  EC.  628-9. 
L  1 


514  PUBLIC    FINANCE.  [BOOK  IV. 

all  cases  an  indeterminate  portion  falls  on  them.  Such  a 
form  of  taxation  is  very  undesirable:  like  a  charge  on 
correspondence,  it  acts  in  restraint  of  trade,  both  with 
respect  to  goods  and  to  business  passengers.  Even  in 
the  case  of  travellers  for  pleasure  it  is  an  impost  on  one 
of  the  most  effective  means  of  improvement.  If  railway 
earnings  are  to  be  taxed,  it  is  better  that  they  should  be 
dealt  with  directly,  either  by  requiring  a  price  for  the 
concession  or  a  portion  of  the  dividends.  To  trust  to  the 
uncertain  action  of  shifting  is  not  advisable  where  com- 
mercial interests  may  be  seriously  affected 1. 

The  same  conclusion  may  be  extended  to  the  treatment 

telegrams  and  parcels.  Unless  on  the  ground  of  financial 
necessity,  the  effort  to  raise  revenue  from  these  factors  of 
trade  cannot  be  justified.  The  defence  of  letter-post 
taxation  is  to  be  found  in  its  general  diffusion,  and  in  the 
fact  that  it  is  hardly  perceived. 

The  treatment  of  the  press  and  advertising  agencies  in 
respect  of  taxation  may  be  next  considered.  Arising  partly 
out  of  the  system  of  control  adopted  by  governments  with 
respect  to  news,  the  taxation  of  newspapers  by  means  of 
stamps  was  employed  in  England,  France,  and  Prussia. 
Both  the  issues  of  newspapers  and  the  advertisements  in 
them  were  taxed.  This  impost  was  first  established  in 
England  in  1712,  at  a  moderate  rate,  but  raised  by  degrees 
till,  in  1815,  it  came  to  4d.  per  sheet,  while  the  duty  for 
each  advertisement  was  3^.  6d.  The  latter  was  abolished 
in  1853,  and  the  newspaper  duty  in  18552.  The  Prussian 
tax  was  repealed  in  1874,  and  the  French  one  three  years 
earlier.  Austria,  however,  has  retained  the  duty  on  news- 
papers. 

The  objections  to  such  taxation  are  plain  enough.  To 
tax  the  press  is  to  check  the  diffusion  of  information  and 

1  Professor  Ely  advocates   taxation   of  gross    receipts  in  order  to  escape 
evasion,  Taxation,  324.     But  where  this  danger  exists  a  more  thorough  reform 
is  wanted.    Taxation  of  railways  by  American  States  on  this  basis  is  particularly 
unsuitable  owing  to  inter-state  competition. 

2  Dowell,  iv.  338-347- 


CHAP.  V1II.1  TAXES   ON   ACTS.  515 

one  of  the  means  of  popular  education.  It  has  the  further 
defect  of  being  very  unequal  in  its  pressure,  and  at  the 
same  time  being  very  likely  to  become  uneconomical,  as  a 
tax  on  journals  hinders  their  sale  and  lowers  their  quality. 
The  advertisement  duty  was  a  direct  check  to  trade  and 
prevented  the  growth  of  businesses  relying  on  the  custom 
of  a  large  and  scattered  body  of  persons.  These  considera- 
tions, together  with  the  small  revenue  from  the  duties — 
.£500,000  at  the  highest  (1815) — made  their  repeal  im- 
perative, unless  where  political  reasons  prevailed. 

§  3.  We  have  more  than  once  had  occasion  to  refer  to 
the  employment  of  stamps  as  a  part  of  the  mechanism  of 
taxation.  A  great  many  fees,  the  postal  revenue,  the 
Russian  and  American  tobacco  taxes,  and  the  newspaper 
duty  in  England  are  or  were  collected  in  this  manner.  It 
is,  however,  in  connexion  with  the  taxes  on  acts  that  the 
form  of  stamp  becomes  particularly  prominent.  So  much 
is  this  the  case  that  '  Stamps'  in  England,  and  '  timbre'  in 
France  are  actually  treated  as  distinct  heads  of  revenue  l. 
It  is  therefore  important  to  clearly  understand  that  there  is 
no  separate  stamp  tax  as  such.  The  term  merely  denotes 
that  the  mode  of  collecting  the  taxes  is  by  the  use  of 
stamps.  This  particular  fiscal  contrivance — first  introduced 
in  Holland,  in  1624 — is  peculiarly  suited  for  levying  taxes 
on  acts  or  commercial  dealings,  and  is  on  that  account 
regarded  as  being  their  special  feature.  Modern  European 
taxation  uses  it  extensively,  and  sometimes  combines  it 
with  the  older  method  of  registration  at  a  public  office. 
The  great  convenience  of  the  stamp  system  results  from  the 
facilities  that  it  gives  for  proportioning  taxation  to  value. 
By  grading  the  prices  of  the  necessary  stamps,  the  tax  on 
any  act  or  transfer  can  be  adjusted  to  the  amount  dealt  in, 
and  the  formalities  are  made  easier  and  less  cumbersome. 

This  system  of  stamp  duties — as  following  English  usage 
we  may  call  it — covers  a  very  wide  field  and  is  growing 

1  See  the  heads  of  revenue  in  the  annual  Statistical  Abstracts,  where  '  stamps  * 
take  a  place  beside  '  customs '  and  '  excise.' 

Ll  2 


516  PUBLIC   FINANCE.  [BOOK  IV. 

in  favour.  Extensions  to  fresh  business  forms,  particularly 
in  connexion  with  Stock  Exchange  transactions,  have  been 
carried  out  both  in  England  and  Germany,  and  higher  rates 
are  probable  in  the  future.  The  chief  groups  into  which 
the  system  maybe  divided  are: — (i)  Taxes  on  law  pro- 
ceedings and  juridical  acts;  (2)  those  on  the  ordinary 
commercial  instruments,  on  stocks,  shares,  &c. ;  (3)  taxes 
on  the  sale  of  property,  especially  immovables ;  and  (4) 
taxes  on  gratuitous  transfers,  including  the  large  and  im- 
portant body  of  duties  on  successions  after  death.  This 
arrangement  is  in  some  respects  open  to  criticism,  for  com- 
mercial transactions  involve  transfers  of  property  and  suc- 
cession duties  have  certain  points  of  difference  from  gifts,  but 
it  is  convenient  as  supplying  an  outline  of  the  classes  of  ob- 
jects taxed,  and  need  not  be  regarded  as  logically  exact. 

§  4.  The  taxation  of  law  proceedings  is  a  development 
of  the  fees  charged  for  judicial  services.  So  far  as  the 
charge  is  merely  a  recompense  for  the  actual  expense  that 
the  proceedings  cause,  it  may  best  be  looked  on  as  a  fee, 
but  if  it  is  raised  to  a  higher  point  in  order  to  cover  some 
of  the  general  expenses  of  justice,  it  is  rather  special 
taxation  levied  on  the  class  of  litigants  for  the  extra 
advantages  it  enjoys.  Certain  classes  of  the  com- 
munity make  greater  use  of  the  tribunals,  and  such  tax- 
ation compels  them  to  contribute  a  part  of  the  expense 
incurred  for  their  use.  More  careful  consideration  shows 
the  error  of  applying  the  rule  of  particular  interest  in  this 
way.  The  administration  of  justice  is  a  general  interest, 
that  affects  rich  and  poor,  litigants  and  non-litigants 
alike.  A  tax  on  legal  process  is  a  hindrance  to  the  use  of 
the  tribunals,  i.  e.  an  obstacle  to  obtaining  legal  remedies. 
The  arguments  of  Bentham  on  this  point  have  never  been 
refuted1,  and  it  seems  that  the  true  course  is  to  reduce 
the  necessary  fees  to  the  lowest  point,  unless  in  the 
exceptional  case  of  commercial  courts,  where  a  small 
contribution  towards  the  permanent  expense  may  perhaps 

1   Theory  of  Legislation,  140. 


CHAP.  VIIL]  TAXES   ON   ACTS.  517 

be  allowable.  Nevertheless,  most  legal  systems  do,  in 
effect,  tax  litigants.  The  English  charges,  so  far  as  direct 
receipts  are  concerned,  hardly  exceed  the  level  of  fees, 
but  there  is  a  good  deal  of  unnecessary  cost  in  the 
methods  of  procedure  that  is  burdensome  to  the  parties, 
and  not  productive  of  revenue  to  the  State.  France  is 
in  somewhat  the  same  position  ;  its  strictly  tax  receipts 
are  probably  somewhat  less  than  those  obtained  in  Eng- 
land 1.  The  German  fees  from  the  courts  of  justice  also 
contain  a  tax  element.  The  annual  Prussian  receipts  from 
this  source  have  varied  from  .£2,000,000  to  ^2,500,000  in 
the  fourteen  years  1875-1889,  though  the  part  inclusion 
of  non-contentious  fees  makes  comparison  difficult.  The 
intrusion  of  taxation  into  this  part  of  administration  should 
be  carefully  watched,  which  is  most  effectively  done  by 
revising  the  scale  of  fees  at  short  intervals. 

Taxation  of  juridical  acts  is  open  to  objection,  as  in  most 
cases  they  are  necessary  for  the  assertion  of  claims  or 
rights,  and  it  can  hardly  be  graduated  in  proportion  to 
value.  As  a  matter  of  policy,  it  is  unwise  to  put  pressure  on 
the  poorer  classes  in  connexion  with  what  is  so  conspicuous 
a  part  of  state  action.  The  fee  principle  is  the  one  really 
applicable  to  such  cases,  unless  a  measure  of  value  can  be 
found,  when  a  proportional  scale  at  a  moderate  rate  may 
be  used,  if  financial  necessities  require  it.  The  method  of 
stamps  enables  this  policy  to  be  carried  out  at  the  lowest 
cost,  and  with,  on  the  whole,  the  least  evasion. 

The  duties  on  juridical  acts  are  not  quite  clearly  separated 
from  those  on  what  we  have  called  commercial  transac- 
tions. The  simplest  relation  between  parties  has  its  legal 
side  :  the  giving  of  a  receipt  or  the  transfer  of  a  share  may 
be  said  to  be  an  act  of  law,  but  in  the  great  majority  of 
cases  this  aspect  of  the  transaction  passes  without  notice, 
and  the  economic  process  attracts  chief  attention.  Deal- 
ings in  bills  of  exchange,  bills  of  lading,  shares,  or  stock, 
in  the  various  forms  that  the  modern  money  market 
*  Cp.  Bk.  ii.  ch.  4.  §  8. 


518  PUBLIC    FINANCE.  [BOOK  IV. 

presents,  may  be  regarded  as  equally  suitable  objects 
for  taxation  with  ordinary  income,  or  the  use  of  com- 
modities. They  have  also  the  advantage,  as  it  is  thought, 
of  falling  on  the  circulation  of  wealth,  and  therefore  corre- 
sponding to  and  supplementing  the  duties  on  the  other 
departments  of  the  economic  process.  Some  recent  advo- 
cates have  discovered  another  useful  function  in  that  they 
are  mainly  levied  on  the  gains  from  speculation  (Conjunctur- 
gewinri),  which,  as  being  '  unearned,'  are  evidently  a  fit 
subject  for  taxation ;  while  finally,  they  present  to  the 
practical  financier  the  pleasing  prospect  of  a  tolerable 
revenue  without  the  social  and  technical  difficulties  that 
the  taxation  of  income  and  commodities  gives  rise  to. 

The  objections  are,  however,  not  to  be  lightly  treated. 
All  such  duties  are,  it  must  be  said,  to  some  extent 
obstructive  of  trade.  A  tax  on  the  formation  of  companies 
is  so  far  a  check  to  their  establishment.  Duties  on  the 
transfer  of  shares  tend  to  keep  capital  from  that  particular 
form  of  investment,  and  to  make  these  evidences  of  owner- 
ship less  mobile.  Even  a  small  tax  on  cheques  is  a  limit 
to  the  extension  of  banking,  and  a  receipt  duty  is  a  charge 
on  the  evidence  of  an  important  class  of  transactions  in 
which  everybody  is  sure  to  be  concerned.  High  rates  are 
in  fact  an  inducement  to  evasion,  or  to  entire  neglect  of 
the  requisite  formalities,  and  therefore  often  cause  injustice 
where  claims  are  disputed.  The  problem  raised  by  this 
part  of  the  tax  system  is,  on  the  one  hand,  to  avoid  undue 
pressure  on  the  circulation  and  transference  of  wealth,  and 
on  the  other,  to  derive  sufficient  revenue  to  make  the 
maintenance  of  the  duties  justifiable.  From  this  point 
of  view  the  English  method  seems  the  best,  viz.  that  which 
raises  a  large  revenue  from  low  duties,  and  escapes  un- 
necessary discrimination  and  complication  by  uniform 
rates,  or  at  most  a  small  number  of  scales.  Great  elabora- 
tion and  minute  distinctions  between  different  classes  of 
acts  are  productive  of  far  more  inconvenience  to  the  tax- 
payers than  of  revenue  to  the  State.  Where,  however, 


CHAP.  VIII.]  TAXES   ON   ACTS.  519 

ad  valorem  rates  can  be  easily  applied,  it  is  possible  to 
combine  simplicity  and  proportionality  to  value. 

One  particular  class  of  duties,  that  on  the  transfer  of  pro- 
perty, and  especially  on  land  and  fixed  capital,  or,  in  legal 
language,  'immovables,'  gives  rise  to  still  more  of  doubt 
and  question.  Heavy  taxation  on  transfer  has  the  effect 
of  lowering  the  value  of  the  articles  subject  to  it,  and 
prevents  their  ready  passage  from  one  owner  to  another. 
In  the  case  of  such  important  commodities  as  land  and 
buildings,  any  result  of  the  kind  is  detrimental  to  economic 
progress.  One  of  the  agents  of  production  is  hindered 
from  reaching  the  possession  of  those  who  could  best  use 
it,  and  the  total  production  of  the  country  is  less  than  it 
would  otherwise  be.  High  duties  on  land  transfer  are 
therefore  forbidden  by  the  strongest  financial  and  economic 
reasons,  viz.  the  injury  they  inflict  on  the  national  wealth, 
and  by  consequence  on  the  public  revenue.  Fees  to  cover 
the  cost  of  the  legal  machinery  needed  for  transfer  are,  as 
it  appeared,  legitimate  ;  and  where  revenue  is  urgently 
required,  a  moderate  transfer  duty  may  be  employed,  just 
as  under  like  conditions  raw  materials  may  be  subject  to 
excise  or  customs  duties. 

On  the  whole,  then,  it  seems  that  the  place  of  taxation 
on  acts,  whether  by  stamps  or  other  machinery,  is  a  sub- 
ordinate one.  It  cannot  wisely  be  used  to  collect  as  large 
a  revenue  as  either  the  primary  taxes  on  income  and 
property,  or  the  duties  on  consumption.  A  very  wealthy 
community  with  large  commercial  transactions  may  be 
able  to  bear  the  levying  of  a  toll  on  them,  provided  that  it 
is  strictly  kept  within  bounds.  The  yield  of  the  penny 
duties  in  England  may  be  taken  as  an  illustration,  but  it 
must  at  the  same  time  be  remembered  that  any  injudicious- 
ness  in  the  imposition  will  cause  a  loss  to  the  trading  com- 
munity not  easily  perceived,  but  none  the  less  present  and 
real  \ 

1  Some  of  the  '  penny '  duties  devised  by  Mr.  Gladstone  erred  in  this  respect ; 
e.  g.  that  on  packages  justified  by  its  author  for  statistical  reasons,  Financial 


520  PUBLIC   FINANCE.  [BOOK  IV. 

§  5.  The  regular  history  of  the  English  stamp  duties 
commences  after  the  Revolution.  By  the  Stamp  Act 
(1694),  duties  varying  from  id.  to  40.9.  were  imposed  on 
legal  instruments,  which  were  grouped  in  six  classes,  and 
each  sheet  of  a  document  was  separately  taxed.  Twenty 
years  later  some  of  the  rates  were  graded  in  proportion  to 
the  value  affected,  and  the  duties  were  increased.  Several 
other  increases  were  made  as  financial  necessities  demanded, 
and  the  yield  of  the  duties  was  larger  \  Bills  of  exchange 
and  promissory  notes  were  brought  under  taxation  in  1782, 
and  receipts  in  the  next  year.  Fresh  increases  followed 
in  the  time  of  the  great  war,  and  a  great  many  complicated 
rates  were  established,  until  in  1815  the  total  yield  was 
£2,800,000,  of  which  £1,100,000  came  from  bills,  notes, 
and  receipts.  Some  reductions  and  improvements  were 
made  in  1850,  and  the  penny  receipt  duty  was  introduced 
by  Mr.  Gladstone  in  1853.  The  further  progress  consisted 
in  a  wider  use  of  the  system  of  low  duties,  a  closer  ap- 
proximation to  ad  valorem  charges  in  the  variable  duties, 
and  an  extension  to  the  new  forms  of  documents  and 
transactions  that  modern  commerce  had  developed.  The 
last-mentioned  movement  is  hardly  concluded,  though 
recent  legislation  has  left  little  to  be  done  in  the  future, 
except  in  the  task  of  removing  anomalies.  The  yield  from 
these  different  forms  has  come  very  close  to  £4,000,000 
annually,  of  which  about  £700,000  is  received  from  bills 
and  promissory  notes,  £900,000  from  the  penny  duties2, 
and  over  £2,000,000  from  the  taxes  on  deeds,  sales,  and 
securities. 

Statements,  161,  295.     The  French  statistical  duties  have  the  same  defect, 
Leroy  Beaulieu,  i.  617. 

1  The  following  are  the  figures  for  selected  years — 

1714  .  .  .  ^117,000 
1727  .  .  .  160,000 
1760  .  .  .  290,000 
1778  .  .  .  442,000, 
Dowell,  iii.  290-1. 

2  In  1 88 1  the  postage  and  revenue  penny  stamps  were  combined,  so  that  the 
exact  receipt  of  the  latter  is  now  a  matter  of  calculation. 


CHAP.  VIII.]  TAXES   ON   ACTS.  521 

The  French  system  is  older  than  the  corresponding 
English  one.  The  duties  at  present  known  as  enregistre- 
ment  and  timbre  can  be  traced  back  to  a  series  of  dues 
existing  under  the  monarcHy  l.  This  was  one  of  the  forms 
of  taxation  that  was  in  substance  preserved  by  the  Consti- 
tuent Assembly,  for  though  it  abolished  the  old  names, 
it  retained  the  regulations  under  the  new  title  ' enregistre- 
ment!  and  dealt  with  the  two  comprehensive  classes  of 
'  acts '  and  '  transfers  of  property,'  including  under  these 
heads  gifts  and  successions  after  death.  Parallel  with  it 
were  the  stamp  duties — first  used  in  France  in  1655 — 
which  were  reformed  in  1791.  The  field  covered  by  this 
system  is  even  more  comprehensive  than  the  English  one. 
Transactions  of  all  kinds  are  brought  within  the  net  of 
taxation  by  elaborate  and  complicated  regulations.  The 
legislation  of  the  revolutionary  period,  which  at  first  was 
ineffective,  owing  to  bad  administration,  became  more  pro- 
ductive as  settled  conditions  were  restored.  The  duties  of 
registration  were  separated  into  '  fixed  '  and  *  proportional,' 
to  which,  since  1872,  an  intermediate  class  known  as 
'  graduated '  duties  has  been  added.  These  groups,  as  their 
several  designations  show,  consist  respectively  of  uniform, 
of  ad  valorem,  and  of  classified  rates.  In  the  corresponding 
stamp  system,  the  charges  depend,  either  on  the  size  of  the 
document  (timbre  de  dimension),  or  on  the  value  dealt 
with,  and  for  the  former  a  scale  is  prescribed.  Cheques, 
receipts,  insurance  policies,  and  other  negotiable  in- 
struments of  very  varied  kinds  are  brought  under  this 
charge. 

As  a  result,  the  yield  of  the  duties  has  been  a  growing 
one.  In  1800  the  total  receipts  were  less  than  £2,800,000. 
By  1816  they  came  to  £5,200,000,  and  in  1830  to 
£7,280,000.  The  total  receipts  in  1860  were  £14,500,000, 
and  the  sum  had,  in  1890,  risen  to  over  £28,000,000 2. 

1  These  charges  were  known  as  contrdle,  insinuation,  and  centime  denier. 
The  stamp  duty  was  known  as  the  formule. 

2  Stourm,  i.  442-3,  468-9;  Leroy  Beaulieu,  i.  528,  533. 


522  PUBLIC   FINANCE.  [BOOK  IV. 

Out  of  this  amount  successions  and  donations  contributed 
over  £7,500,000,  and  the  duties  on  land-transfer  over 
.£6,000,000. 

\  This  great  increase — tenfold  in  ninety  years,  and  nearly 
twofold  between  1830  and  1860,  and  again  between  the 
latter  year  and  1890 — is  due  to  three  distinct  causes,  viz. 
(i)  the  normal  growth  of  wealth  and  transactions  respecting 
it ;  (2)  the  extension  of  the  duties  to  new  cases  ;  and  (3) 
the  establishment  of  higher  rates  ;  and,  so  far  as  the  stamp 
duties  are  concerned,  the  effect  of  each  has  been  about 
equal.  There  seems  to  be  little  doubt  that  in  many  cases 
the  rates  are  far  too  high,  and  the  regulations  too  difficult. 
Especially  in  the  case  of  land-transfer  is  the  first  defect 
noticeable.  The  duties  directly  imposed  on  sale  are  nearly 
7  per  cent.,  and  with  the  stamps  and  fees  the  total 
charge  is  over  10  per  cent.,  /.  e.  where  land  sells  for  30 
years'  purchase  it  amounts  to  at  least  three  years'  income. 
Such  a  rate  is  open  to  the  severest  condemnation,  as  tend- 
ing to  immobilize  the  most  important  form  of  property  and 
thereby  to  reduce  the  productive  power  of  the  community. 

The  influence  of  French  financial  legislation  on  neigh- 
bouring countries  has  been  considerable,  and  nowhere  more 
than  in  Italy.  The  duties  on  transactions  in  that  country 
have  been  formed  on  the  same  general  lines  as  the  enregistre- 
ment  and  timbre,  and  have  increased  even  more  rapidly  in 
their  returns.  From  £1,400,000  in  1862  they  rose  to 
£3,600,000  in  1875,  and  £5,080,000  in  1888,  while  the 
succession  duties,  which  were  only  £280,000  in  1862,  had 
become  £1,400,000  in  1888.  Enlarged  territory,  higher 
rates  of  duty,  and  greater  stringency  in  collection  are  the 
chief  reasons  for  the  higher  revenue  thus  obtained. 

Neither  registration  nor  stamp  duties  have  acquired  as 
much  financial  importance  in  the  German  States.  The 
transfer  of  land  is  not  heavily  burdened,  and  the  methods  of 
registration  are  devised  for  the  convenience  of  the  parties 
concerned.  The  succession  duties  are  as  yet  confined  to 
the  separate  States,  but  an  imperial  system  of  taxes  on 


CHAP.  VIII.]  TAXES  ON   ACTS.  523 

commercial  affairs  has  been  established.  Bills  of  exchange, 
shares  and  credit  instruments,  have  been  by  degrees  brought 
under  very  moderate  taxation.  The  total  returns  from  the 
several  duties  were  only  £1,500,000  in  1886-7 — very  much 
below  the  English,  French,  or  Italian  receipts. 

§  6.  The  actual  operation  of  the  duties  on  transactions  is 
not  always  capable  of  being  precisely  estimated,  and  in 
regard  to  some  of  the  classes  the  question  of  incidence  has 
given  rise  to  much  dispute.  Very  often  a  transaction  has 
reference  to  some  material  commodity,  and  then  a  duty  on 
it  may  be  plausibly  assimilated  with  an  ordinary  tax  on 
commodities,  and  the  same  principles  applied  in  its  discus- 
sion. To  levy  a  charge  on  transactions  connected  with 
production  is,  so  far,  an  increase  in  the  expenses  of  produc- 
tion, that  the  producer  and  dealer  will  endeavour  to  shift 
to  the  consumer.  In  most  of  the  taxes  on  receipts  and 
bills  the  burden,  falling  as  it  does  on  trade  as  a  whole,  may 
be  regarded  as  a  tax  on  business  gains.  Whether  any  of  it 
will  be  represented  in  higher  prices  to  the  consumers  will 
depend  on  the  extent  to  which  the  burden  is  unequally  im- 
posed, but  under  actual  conditions  this  effect  is  not  very 
likely  to  be  experienced.  The  duties  are  too  small  a 
proportion  of  the  total  cost  to  have  any  influence  on 
prices. 

Where  transfers  of  property  are  taxed  the  problem 
becomes  more  difficult,  and  there  is  room  for  doubt  as  to 
the  real  incidence  of  the  charge.  From  one  point  of  view 
it  may  be  held  that  the  purchaser,  like  the  consumer  of 
commodities,  will  in  the  long  run  bear  the  burden,  and 
that  therefore  the  price  of  land  or  shares  would  rise  in  pro- 
portion to  the  tax.  Another  view,  represented  by  Adam 
Smith  and  J.  S.  Mill,  assumes  that  in  transactions  with 
respect  to  land  the  seller  is  the  more  necessitous,  and 
has  therefore  to  reduce  his  price  by  the  amount  of  the  tax x. 
For  a  somewhat  different  reason  this  way  of  regarding  the 

1  '  Taxes  upon  the  sale  of  land  fall  altogether  upon  the  seller,'  Wealth  of 
Nations,  364;  cp.  Mill,  Principles,  Bk.  v.  ch.  5.  §  i. 


524  PUBLIC   FINANCE.  [BOOK  IV. 

matter  may  be  extended.  Forms  of  property  are  purchased 
for  the  income  that  they  yield,  but  the  effect  of  a  tax,  so 
far  as  it  is  paid  by  the  buyer,  is  to  lower  the  return 
obtained,  and  besides  to  make  the  principal  less  saleable  in 
the  future.  It  might  accordingly  be  supposed  that  pur- 
chasers would  take  all  these  elements  into  account,  and 
place  the  whole  weight  of  the  present  and  future  charges 
on  the  actual  holder.  The  tax  on  transfer  would  in  fact 
resemble  a  fixed  tax  on  the  object  sold,  such  as  the  per- 
manent land  tax.  There  is,  on  the  whole,  good  reason  for 
believing  that  the  incidence  is  divided  between  buyer  and 
seller  ;  the  former  gets  less  than  he  would  receive  if  there 
were  no  tax,  the  latter  pays  more  than  he  would  on  the 
same  supposition  \  and  some  persons  keep  out  of  dealing 

)  on  account  of  the  tax. 

Where  bills  of  exchange  and  commercial  instruments,  as 
stocks  and  shares,  are  affected,  another  result  may  be  found. 
Taxation  imposed  in  one  country  will  tend  to  drive 
away  floating  capital.  A  heavy  tax  on  transactions  in 
the  London  money  market  is  so  far  an  inducement  to  shift 
them  to  another  country.  On  this  ground  it  is  very  un- 
desirable to  tax  international  stocks  at  a  higher  rate  than 
exists  elsewhere.  The  utmost  care  is  needed  in  limiting 
this  form  of  taxation  so  as  to  avoid  injurious  action  on 
capital. 

\  §  7.  One  large  and  productive  form  of  taxation  which 
actual  legislation  combines  with  the  transfer  and  stamp 
duties,  must  now  be  more  fully  considered — the  duties  im- 
posed on  succession  after  death,  in  well-known  English 
phraseology  the  '  death  duties.'  Though  they  are  certainly 

1  Suppose  for  example  that  a  property,  which  free  of  duty  would  sell  for 
j£io,ooo,  is  subject  to  10  per  cent,  on  transfer.  If  the  whole  tax  fell  on  the 
seller  he  would  only  get  .£9000,  if  it  all  fell  on  the  buyer  he  would  pay 
.£1 1,000.  Is  it  not  plain  that  if  an  exchange  is  to  take  place  the  probability  is 
that  there  will  be  a  division  of  the  tax  ?  When  there  are  many  transactions  the 
less  eager  buyers  and  sellers  will  withdraw,  and  there  will  be  fewer  dealings  at 
a  higher  price,  the  tax  included.  See  Bohm-Bawerk,  Positive  Theory  of  Capital 
(Eng.  Trans.),  203-13,  for  the  theoretical  basis  of  this  position. 


CHAP.  VIII.]  TAXES   ON   SUCCESSIONS.  525 

taxes  on  the  transfer  of  property,  and  are  usually  collected 
by  means  of  stamps,  the  points  of  difference  are  greater 
than  the  resemblances.  Their  relations  to  property,  their 
incidence,  and  the  absence  in  their  case  of  the  ordinary 
conditions  of  exchange,  all  make  a  separate  treatment 
desirable. 

The  origin  of  these  duties  may  be  traced  to  the  claim  of 
the  ruler  to  take  possession  of  goods  that  had  no  owner,  or 
perhaps  more  often  to  the  feudal  due  payable  at  each 
change  of  hands  ;  but  we  find  the  policy  pursued  at  an 
earlier  date  in  the  5  per  cent,  duty  introduced  by  Augustus 
on  all  inheritances,  except  those  of  very  near  relatives l. 
Modern  States  have  largely  developed  the  system  with 
very  varied  scales  and  grades  of  duty,  so  that  it  has  come 
to  be  almost  universally  regarded  as  an  essential  constituent 
of  any  well-arranged  scheme  of  Finance.  But  notwith- 
standing this  general  agreement,  the  theoretic  difficulties 
that  such  taxation  suggests  are  by  no  means  trivial.  Taxes 
on  successions  have  the  great  economic  fault  of  being 
taxes  on  property  as  opposed  to  income,  and  of  tending  to 
retard  the  growth  of  wealth.  The  force  of  this  objection 
varies  considerably  at  different  stages  of  progress,  and  it 
increases  rapidly  as  the  rate  of  duty  becomes  higher.  A 
sufficiently  high  tax  on  successions  will  stop  accumulation 
in  any  country,  no  matter  what  its  position.  The  scale  of 
duties  must  therefore  be  so  adjusted  as  to  avoid  this  result. 
A  more  strictly  financial  difficulty  is  the  risk  of  evasion 
that  a  high  duty  is  sure  to  cause.  Unless  gifts  and  sales 
are  taxed  at  the  same  rate  as  successions,  various  contriv- 
ances are  sure  to  be  tried  by  which  the  liability  would  be 
escaped,  but  so  comprehensive  a  plan  of  taxation  would 
destroy,  or  at  least  seriously  dimmish,  trade  and  industrial 
activity.  So  far  as  the  smaller  successions  are  affected, 
heavy  taxation  is  evil  in  another  way,  since  it  often  presses 
very  hardly  on  the  payers  at  a  time  of  need.  This  applies 
more  particularly  to  successions  on  the  part  of  wives  and 

1  The  vicesima  heredilatum. 


526  PUBLIC   FINANCE.  [BOOK  IV. 

children,  but  even  with  collaterals  it  is  a  hardship.  All 
these  circumstances  converge  towards  the  proposition  that 
strict  regard  should  be  had  to  moderation  in  the  employ- 
ment of  this  form  of  taxation.  Carried  beyond  due  limits, 
it  will  prove  to  be  oppressive  and  economically  injurious. 

From  the  side  of  just  distribution  a  further  difficulty 
arises.  Assuming  that  proportionality  to  income  is  the 
proper  rule  for  the  division  of  the  compulsory  public 
charges,  how  can  we  include  the  large  and  uncertain  pay- 
ments for  successions  in  this  distribution  ?  The  easiest 
mode  of  calculation  seems  to  be  that  which  regards  the 
succession  duty  as  a  capitalized  income-tax  paid  once  for 
all  at  the  close  of  life,  instead  of  in  small  amounts  during 
each  year.  This  treatment  would  only  apply  to  a  uniform 
duty  such  as  the  English  Probate ;  the  varying  scales 
for  different  degrees  of  succession  depend  on  a  different 
principle.  The  old  idea  that  the  wife  and  children  of  the 
deceased  are  in  a  sense  joint  owners  of  the  property,  or  at 
least  have  a  moral  claim  to  succession,  is  still  powerful ; 
they  moreover  are  often  hard  pressed  at  the  time  of  succes- 
sion, and  accordingly  heavy  taxation  would  involve  great 
sacrifice  and  excite  irritation,  while  it  would  certainly  offer 
the  strongest  stimulus  to  attempts  at  evasion.  The  influence 
of  these  conditions  is  shown  in  the  universal  adoption  of 
lower  rates  for  successions  by  near  relatives  ;  though  there  is 
much  difference  in  the  actual  concessions  made  in  different 
countries. 

Another  form  of  graduation  has  been  much  discussed, 
viz.  that  by  which  the  larger  inheritances  are  subjected  to 
increased  duties,  or  in  other  words,  the  system  of  pro- 
gressive death  duties.  The  general  arguments  on  the 
question  of  progression  need  not  be  again  considered  1)  but 
in  respect  to  successions  the  idea  of  promoting  a  greater 
equality  of  wealth  has  gained  some  opponents  of  pro- 
gression generally  to  favour  its  use  in  their  case  2.  Practical 

1  See  Bk.  iii.  ch.  3.  §§  5,  6,  7. 

2  E.g.  J.  S.  Mill,  who  declares  'The  principle  of  graduation  .  .  .  seems  to 


CHAP.  VIII.]  TAXES   ON    SUCCESSIONS.  527 

legislation  has  done  little  in  this  direction.  The  lenient 
treatment  of  very  small  estates  in  England  may  be  ex- 
plained on  the  principle  of  exempting  a  minimum  from 
taxation,  and  the  new  estate  duty  has  been  defended  by 
Mr.  Goschen  as  tending  to  establish  real  proportionality  in 
taxation1.  A  few  Swiss  Cantons  have  attempted  a  mo- 
derate progressive  tax  on  successions,  but  elsewhere  pro- 
portional, or  even  '  regressive,'  rates  have  been  retained  2. 

§  8.  The  English  death  duties  begin  with  the  Stamp 
Act  (1694)  which  placed  $s.  on  Probates  over  £20.  This 
uniform  charge — doubled  a  few  years  later — continued  till 
1779,  when  three  scales  of  duty  were  introduced.  The 
usual  process  of  increase  was  carried  on,  and  the  ad 
valorem  principle  was  reached  by  gradual  approximation 
in  1889.  The  duty  now  stands  at  3  per  cent.,  imposed  on 
all  Probates  and  letters  of  Administration.  The  old  ar- 
rangement, by  which  a  maximum  rate  was  fixed  at  a  cer- 
tain point3,  has  disappeared,  and  estates  under  ;£ioo  and 
.£300  receive  special  favours.  This  direct  charge  on  the 
estate  is  protected  by  the  'account  duty,'  introduced  to 
check  evasions  and  applicable  to  gifts  made  within  a  year 
of  death.  These  duties  do  not  apply  to  real  or  to  settled 
property,  and  therefore  fail  in  comprehensiveness. 

The  legacy  duty,  first  imposed  in  1780,  developed  in  the 
same  way.  Though  a  charge  on  the  receiver  of  the  be- 
quest, it  is,  like  the  income-tax  in  many  cases,  to  be  paid 
from  the  source,  that  is,  the  estate,  and  deducted  in  the 
payment.  Unlike  the  Probate  duty  with  its  practically 
uniform  scale,  it  varies  according  to  degree  of  relationship, 
and  for  descendants  it  is  now  absorbed  in  the  former. 


me  both  just  and  expedient  as  applied  to  legacy  and  inheritance  duties/ 
Principles,  Bk.  v.  ch.  2.  §  3. 

1  '  On  the  whole,  I  think,  it  will  be  found  that  the  men  whose  fortunes  are 
considerable  are  those  who  pay  the  least  in  proportion  to  their  aggregate 
income,'  Budget  Speech,  April  18,  1889. 

3  Cohn,  §  351. 

3  This  limit  was  raised  from  .£5000  to  .£10,000,  then  to  .£100,000,  next  to 
^500,000,  lastly  in  1815  to  £"1,000,000.  It  was  abandoned  in  1859. 


528  PUBLIC   FINANCE.  [BOOK  IV. 

Its  highest  point,  10  per  cent.,  is  reserved  for  strangers  and 
very  distant  relatives. 

The  parallel  tax  on  realty  and  settled  personalty,  the 
succession  duty,  only  dates  from  1853.  Pitt  had  failed  to 
establish  a  tax  of  the  kind  in  1796,  and  it  was  with  great 
difficulty  that  the  budget  plan  of  1853  was  carried.  It 
amounted  to  an  extension  of  the  legacy  duty  to  successions 
hitherto  exempt  \  This  undoubtedly  just  proceeding  failed 
at  first  to  accomplish  what  was  expected  ;  instead  of  the 
estimated  ,£2,000.000,  its  average  yield  has  been  about 
,£700,000,  or  roughly  speaking,  one-third  of  what  was  antici- 
pated. The  great  number  of  lineal  successions  and  the 
exemption  of  debts  from  the  duty  explain  this  failure. 

The  latest  addition  to  this  group  of  taxes  is  the  Estate 
duty  of  1889,  which  is  a  supplement  of  i  per  cent,  to  the 
Probate  and  Succession  duties  where  the  property  exceeds 
£10.000.  Regarded  as  a  whole  the  system  is  extremely 
complex  and  presents  some  striking  anomalies.  The 
separation  of  real  and  personal  property  and  the  different 
treatment  given  to  each2  are  at  first  sight  a  grave  injustice. 
The  heavy  local  taxation  on  land  and  buildings  supplies  a 
partial  justification,  and  there  is  the  further  difficulty  of 
requiring  an  immediate  payment  that  could  not  be  met  out 
of  the  annual  yield  of  land— the  existing  succession  duty, 
if  paid  at  once,  would  mean  at  lowest  a  year's  income.  It 
may  even  be  suggested  that  with  such  a  durable  property 
as  land,  an  annual  tax  equivalent  to  the  present  succession 
duty  would  be  preferable,  especially  bearing  in  mind  that 
by  far  the  greater  number  of  successions  are  by  near  rela- 
tives. Either  this,  or  the  inclusion  of  real  property  under 
the  Probate  duty,  and  its  treatment  exactly  as  if  it  were 
personalty,  should  be  adopted.  The  question  of  settle- 
ments is  still  more  difficult.  The  present  system  favours 

1  '  We  propose  to  alter  the  law  and  ...  to  extend  the  legacy  duty  to  all 
successions  whatever,'  Gladstone,  Financial  Statements,  62. 

2  Thus  real  property  pays  no  Probate  duty,  and  the  succession  duty  on  it  is 
not  due  for  a  year  after  death  ;  it  can  be  paid  by  eight  instalments,  and  it  is 
calculated  on  the  life  interest  only,  not  on  the  full  value. 


CHAP.  VIII.]  TAXES  ON   SUCCESSIONS.  529 

the  tying-up  of  property,  a  course  neither  economically  nor 
financially  advantageous.  For  this  the  most  effective  re- 
medy will  probably  be  found  in  the  equalization  of  the 
charge  on  deeds  of  settlement  and  Probates,  which  would 
at  once  remove  any  artificial  encouragement  to  the  former 
course.  It  is  true  that  a  duty  of  3  per  cent,  would  be 
heavily  felt,  but  it  would  be  quite  as  fair  as  the  existing 
Probate  duty. 

The  revenue  derived  from  the  death  duties  has  increased 
largely  in  the  present  century,  and  now  stands  at  nearly 
.£10,000,000;  but  of  this  sum  half  the  Probate  duty  (or 
about  one-quarter  of  the  total)  is  paid  to  the  local  authori- 
ties1. In  spite  of  occasional  irregularities  the  yield  is  at 
once  reliable  and  progressive,  and  takes  its  place  along 
with  the  income  tax  as  an  important  contribution  to  the 
direct  taxation  that  counterbalances  the  excise  and  cus- 
toms 2. 

§  9.  By  the  elaborate  system  of  registration  the  French 
duties  on  successions  are  made  a  sub-division  of  the  general 
mode  of  taxing  transfers.  This  method  is  most  effective 
as  a  technical  arrangement,  but  it  has  the  disadvantage  of 
keeping  the  ordinary  duties  on  exchange  at  a  higher  rate 
than  they  should  be.  The  duties  for  lineal  descendants 
are  more  moderate  than  in  England,  1*25  per  cent.  For 

1  The  receipts  for  1890-1  were  £7,444,000,  exclusive  of  .£2,412,000,  the  local 
part  of  the  Probate,  i.  e.  a  total  of  £9,856,000.     The  half  of  the  Probate  retained 
for  the  central  budget  is  now  more  than  the  whole  receipts  from  that  duty  in 
any  year  before  1879.   The  growth  of  the  total  duties,  which  has  been  continuous, 
is  best  seen  by  the  date  at  which  each  additional  million  was  reached. 

Year.  £  (ooo'j  omitted?) 

1813  .        .        .  1,005 

1828  ...  2,117 

1856-7  .        .         .  3,121 

1865-6  .         .        .  4,303 

1871-2  .        .        .  5,360 

1876-7  .        .        .  6,024 

1881-2  .        .        .  7,249 

1887-8  .        .        .  8,241. 

2  For  the  English  death  duties,  Dowell,  iii.  124-140;  Buxton  and  Barnes, 
Death  Duties. 

M  m 


530  PUBLIC   FINANCE.  [BOOK  IV. 

brothers  and  sisters  the  tax  of  over  8  per  cent,  is  decidedly 
too  high :  it  hardly  differs  from  that  of  the  next  degree. 
For  husband  and  wife  the  tax  is  a  little  higher  than  in  Eng- 
land (375  per  cent.),  and  in  all  cases  the  stamps  have  to  be 
added  \ 

In  another  point  the  French  system  is  inferior  to  the 
English,  as  the  gross,  not  the  net,  value  is  taxed.  The  ab- 
sence of  any  allowance  for  debts  is  a  serious  grievance  in 
the  French  succession  duties2.  On  the  other  hand  the 
fixed  estimate  of  land  at  twenty-five  times  its  annual 
value  is  fairer  than  the  English  method  of  estimating  the 
successor's  interest  as  only  a  life  one. 

The  Italian  duties  are  somewhat  higher  on  lineal  suc- 
cessions than  the  French,  but  a  little  lighter  in  other  cases, 
and  deduction  of  debts  is  allowed  (if  proved  on  good 
evidence).  The  amount  received  from  this  source  in 
1889-90  was  less  than  ;£i, 500,000. 

The  duties  in  the  several  German  States  are  even  less 
effective.  The  Prussian  estimate  for  1889-90  was  only 
6,900,000  marks  (£345,000).  In  nearly  all  the  States  lineal 
descendants  pay  no  duty,  and  in  Prussia  ascendants  arid 
husband  or  wife  are  also  free.  Two  per  cent,  is  the  rate 
for  brothers,  and  the  highest  point  is  only  8  per  cent.  A 
complete  reform  of  the  rates  would  appear  to  be  obviously 
suggested  by  English  and  French  experience. 

Some  of  the  American  '  States '  have  duties  on  succes- 
sions of  collaterals  :  the  rate  in  Maryland  is  2*5  per  cent., 
it  is  5  per  cent,  in  New  York  and  Pennsylvania  3. 

§  10.  The  problem  of  incidence  might  at  first  be  sup- 
posed not  to  arise  at  all  in  this  connexion.  '  Taxes  upon 
the  transference  of  property  from  the  dead  to  the  living,' 

1  The  absence  of  a  Probate  duty  levied  on  the  estate  makes  these  comparisons 
not  quite  accurate.  A  wife  in  England  who  gets  the  residue  of  an  estate 
practically  pays  3  per  cent,  on  its  whole  net  value. 

3  The  rule  by  which  the  usufructuary  or  '  life  tenant '  pays  half  duty  and  the 
bare  proprietor  the  full  rate  in  addition  is  a  further  injustice.  See  Journal  des 
Economistes,  Feb.  1892,  186-92. 

3  New  York  has  lately  adopted  a  direct  inheritance  tax  of  I  per  cent,  on 
estates  over  $10,000. 


CHAP.  VIII.]  TAXES  ON   SUCCESSIONS.  531 

said  Adam  Smith,  '  fall  finally,  as  well  as  immediately, 
upon  the  persons  to  whom  the  property  is  transferred ' 1. 
But  this  view  altogether  neglects  the  ulterior  effects  on  the 
distribution  of  wealth  that  the  duties  may  bring  about.  f 
If,  as  Ricardo  argued,  they  fall  mainly  on  capital,  it  is 
evident  that  the  whole  society  suffers  by  less  efficient 
production,  and  it  is  also  probable  that  the  higher  value  of 
the  remaining  capital  will  lead  to  a  rise  in  interest  and  a 
consequent  fall  in  wages.  Hard  as  it  may  be  to  trace 
these  results  in  any  actual  case,  yet,  given  the  conditions, 
^they  must  be  in  existence.  The  pressure  of  death  duties 
on  capital  is  not  however  so  clear.  The  English  receipts 
of  £10,000,000,  or  the  French  of  £7,000,000,  are  but  a 
small  part  of  the  annual  savings  (not  more  than  6  or  7  per 
cent).  Even  if  we  suppose  the  whole  amount  added  to 
savings  the  effect  would  be  almost  imperceptible.  This, 
however,  could  not  happen,  as  an  equal  amount  of  taxation 
would  have  to  be  imposed  in  other  directions,  and  it  would 
in  some  degree  trench  on  capital. 

In  fact  we  may  regard  the  succession  duties  as  present- 
ing a  parallel  to  the  income-tax.  The  latter  withdraws 
annually  for  the  service  of  the  State  a  portion  of  the  new 
wealth  created  in  the  period  ;  the  former  operate  in  the 
same  way,  but  at  uncertain  intervals,  on  the  collected 
wealth  of  the  Society. 

1   Wealth  of  A'ations,  364. 


M  m  2 


BOOK    V. 


THE   RELATIONS   OF  EXPENDITURE   AND 
RECEIPTS. 


CHAPTER   L 

INTRODUCTORY. — STATE  HOARDING. 

§  1.  THE  preceding  books  have  been  devoted  to  the  con- 
sideration of  the  various  questions  connected  with  public 
expenditure  and  revenue.  We  have  seen  that  there  ought, 
under  usual  conditions,  to  be  a  balance  between  these  two 
sides  of  financial  activity.  Outlay  should  not  exceed  income, 
or — and  this  is  more  often  the  way  in  which  the  case  is  pre- 
sented— tax  revenue  ought  to  be  kept  up  to  the  amount 
required  to  defray  expenses.  The  financier,  so  far  differing 
from  the  business  manager,  should  not  aim  at  a  surplus,  but 
neither  should  he  allow  a  deficit.  Either  is  an  indication 
of  some  defect  in  calculation  or  administrative  system. 

This  general  principle  must,  however,  admit  of  modifica- 
tions. Temporary  deficits  and  surpluses  cannot  be  avoided. 
In  the  management  of  a  large  financial  organization  com- 
plete equalization  of  receipts  and  expenditure  could  hardly 
ever  be  obtained,  or,  if  it  were,  would  be  due  to  chance.  The 
many  different  forms  of  expenditure  and  the  varying  pro- 
ductiveness, both  of  the  quasi-private  and  the  tax  revenue, 
forbid  minute  agreement.  All  that  can  be  claimed  is  a  sub- 
stantial approach  to  a  balance  in  the  two  sides  of  the 
account.  The  safest  rule  for  practice  is  that  which  lays 
down  the  expediency  of  estimating  for  a  moderate  surplus, 
by  which  the  possibility  of  a  deficit  will  be  reduced  to  a 
minimum. 

The  foregoing  consideration  would  apply  to  any  system 


1336  PUBLIC   FINANCE.  [BOOK  V. 

of  Finance  in  its  ordinary  or  usual  state,  but  the  difficulty 
of  adjustment  is  much  increased  by  the  operation  of  what 
has  been  described  as  extraordinary  outlay1.  Occasions, 
as  we  saw,  will  from  time  to  time  arise  in  which  it  becomes 
necessary  to  spend  large  sums  for  particular  objects.  War 
and  the  execution  of  public  works  are  the  great  causes  of 
this  sudden  increase  of  expenditure,  and  the  former  of  these 
is  very  hard  to  foresee  and  provide  against.  In  any  case 
it  may  fairly  be  said  that  exceptional  charges  of  the  kind 
should  not  be  altogether  met  out  of  current  income.  As 
I  the  advantages  realized  are  of  indefinite  duration,  it  seems 
fair  that  the  charge  should,  in  popular  language,  be  spread 
over  a  number  of  years.  Without  at  present  criticising 
this  doctrine,  we  may  remark  that  the  political  conditions 
place  limits — elastic  ones  it  is  true — on  the  revenue-collect- 
ing powers  of  the  administration,  and  that  in  practice  there 
are  only  two  expedients  for  meeting  abnormal  outlay,  viz. 
either  the  modern  method  of  incurring  debt,  or  the  older 
one  of  storing  up  treasure  or  other  disposable  wealth  for 
the  time  of  need.  The  absence  of  equilibrium  in  public 
Finance  must  show  itself  in  the  creation  of  a  surplus 
store  of  wealth,  or  in  the  formation  of  liabilities.  In  the 
present  chapter  we  shall  therefore  examine  the  policy 
of  forming  public  treasures  or  other  reserves,  in  order 
to  provide  for  the  necessities  of  the  State  in  times  of 
emergency. 

§  2.  The  system  of  public  treasures  can  lay  claim  to  a 
high  antiquity.  Thus  the  Athenians  in  the  period  imme- 
diately preceding  the  Peloponnesian  war  accumulated  a 
sum  of  9,700  talents,  and  at  its  outbreak  had  actually  6,000 
talents  in  store.  Even  earlier,  the  Persian  sovereigns  had 
collected  the  tribute  of  their  provinces  in  the  shape  of  con- 
tributions of  the  precious  metals,  large  stocks  of  which  fell 
into  the  hands  of  Alexander 2.  The  same  policy  of  hoard- 

1  Cp.  Bk.  i.  ch.  8.  §§  i  sq. 

2  Thucydides,  Bk.  ii.  ch.  13;  Grote,  Hist.  Greece,  xi.  498-500;  Roscher, 
§  124.  n.  i. 


CHAP.  I.]  STATE    HOARDING.  537 

ing  was  followed  by  the  Romans.  The  stores  of  the  sove- 
reigns conquered  by  them  were  accumulated,  and  the  special 
tax  on  the  emancipation  of  slaves  was  used  in  the  same 
way.  The  possession  of  the  treasury  became  a  leading 
object  of  the  rival  parties  in  the  civil  wars  that  overthrew 
the  Republic  \ 

Like  facts  are  noticeable  in  the  mediaeval  period.  One  of 
the  first  objects  of  the  successor  to  the  Crown  on  the  death 
of  a  king  was  to  gain  possession  of  the  treasure.  Both 
in  England  and  France  there  were  several  instances  of  this 
eagerness  2.  The  treasure  and  the  kingdom  were  regarded 
as  a  joint  possession,  each  being,  in  accordance  with  the 
conceptions  of  the  time,  looked  on  as  equally  a  form  of 
property.  The  practice  lasted  in  England  till  the  time  of 
Henry  VIII,  who  speedily  dissipated  the  savings  of  his 
prudent  father.  Henri  IV,  who  in  this  was  guided  by 
Sully,  was  the  last  French  monarch  who  maintained  a 
treasure  3. 

By  the  time  of  Adam  Smith  the  practice  had  decayed  : 
he  notes  that  the  canton  of  Bern  was  the  only  Republic, 
as  Prussia  was  the  only  monarchy,  that  continued  to  keep  a 
reserve  4.  The  latter  country  has  been  remarkable  in  this 
respect.  Thus  Frederic  William  I  (1713-1740),  as  Carlyle 
tells  us,  *  Yearly  made  his  own  revenues,  and  his  people's 
along  with  them,  and  as  the  source  of  them  larger  :  and  in 
all  states  of  his  revenue  he  had  contrived  to  make  his  ex- 
penditure less  than  it ;  and  yearly  saved  masses  of  coin  and 
"  deposited  them  in  barrels  in  the  cellars  of  his  Schloss  6." ' 
His  successor,  Frederic  the  Great  (1740-1786),  continued 
this  system,  and  it  affords  a  striking  instance  of  the  persist- 
ence of  national  policy  when  we  find  that  the  present 
German  Empire  follows  what  is  virtually  the  same 
method. 

§  3.  The  reasons  that  induced  so  many  States  to  accumu- 

1  Roscher,  op.  cit. ;  Merivale,  Romans  under  the  Empire,  ii.  169. 

8  Sinclair,  Hist,  of  Revenue,  i.  76.  8  Wealth  of  Nations,  386. 

*  Ibid.  s  Frederic,  i.  290. 


538  PUBLIC    FINANCE.  [BOOK  V. 

late  treasure  are  to  be  found  in  the  conditions  of  society 
existing  at  the  time.  A  very  rude  community  will  have  no 
need  of  a  store  of  money ;  weapons  and  provisions  would 
be  more  useful  in  its  case.  The  system  of  money  dealings 
must  have  come  into  being  before  hoarding  can  be  regarded 
as  the  duty  of  a  wise  sovereign.  Once  that  point  has  been 
reached,  the  great  convenience  of  having  a  stock  of  a  univer- 
sally desired  article  on  hand  is  too  plain  to  be  overlooked. 
The  efficient  maintenance  of  an  army  in  the  field  depends 
in  a  great  degree  on  the  supply  of  what  is  so  often  called 
the  '  sinews  of  war.'  Cases  are  not  unknown  where  expedi- 
tions failed  altogether  from  want  of  this  indispensable 
auxiliary.  The  superstitious  reverence  for  the  precious 
metals  and  the  force  of  habit  may  partly  account  for  the 
great  treasures  of  ancient  States  ;  but  they  owe  their  con- 
tinuance far  more  to  their  felt  necessity.  Where  credit 
was  undeveloped,  and  taxes  were  occasional  and  uncertain 
expedients,  a  State  that  had  no  treasure  was  in  a  dangerous 
situation,  unprepared  either  for  attack  or  defence.  The 
position  of  the  sovereign  in  earlier  times  as  a  large  pro- 
perty-holder was  contributory  to  the  same  result.  Lands, 
forests,  mines,  and  various  lucrative  claims  were  in  the  pos- 
session of  the  ruler.  The  treasure  came  to  be  looked 
on  as  one  part  of  this  extensive  class,  serving  a  particular 
purpose  and  completing  the  public  economy. 

As  the  system  of  state  hoarding  was  produced  by  the 
economic  conditions  of  the  periods  in  which  it  was  em- 
ployed, so  the  change  to  the  modern  economic  organization 
necessarily  led  to  its  abandonment.  The  increased  pro- 
ductiveness of  taxes,  and  the  facility  with  which  credit 
could  be  used,  relieved  governments  from  the  duty  of 
keeping  a  stock  of  bullion  for  emergencies.  The  State 
ceased  to  be  its  own  banker  and  came  to  rely  on  the 
instrument  supplied  by  the  growth  of  credit.  Not  only 
were  the  ultimate  advantages  greater,  but  there  was  an 
immediate  benefit  in  the  saving  of  the  amount  required  to 
replenish  the  store  when  it  had  from  any  cause  run  down. 


CHAP.  I.]  STATE   HOARDING.  539 

Borrowing  at  times  of  need  was  more  pleasant  than  a  long 
course  of  previous  saving.  The  change  was,  as  we  have 
seen,  as  gradual  as  the  alteration  in  the  ruling  conditions 
that  produced  it.  The  keeping  of  stores  of  bullion  died 
out  slowly,  and  has  even  left,  as  in  the  case  of  Germany, 
survivals  to  the  present  day.  This  last  instance  deserves 
some  further  notice.  The  traditional  policy  of  storing  up  a 
reserve  for  the  pressure  of  war  was  applied  to  the  German 
Empire  by  means  of  the  resources  obtained  through  the 
French  indemnity.  A  sum  of  £6,000,000  was  held  in 
bullion  and  a  much  larger  amount  was  invested  in  high- 
class  securities,  chiefly  German  railways  and  the  debts  of 
foreign  countries.  The  '  fund  for  invalids '  came  to  nearly 
£35,000,000  in  1889.  There  is,  therefore,  a  reserve  of  over 
£30,000,000  held  by  the  Empire  in  what  is  practically  the 
form  of  a  hoard,  and  apparently  ready  for  use  in  time 
of  war. 

German  economists  have  defended  this  proceeding  on 
the  ground  that  it  is  imperatively  required  for  military 
necessities.  The  use  of  the  treasure  in  the  past  is  dwelt  on, 
and  it  is  further  urged  that  at  the  outbreak  of  war  the 
money  market  is  so  strained  that  a  large  loan  is  costly,  if 
not  unobtainable.  The  treasure  or  war  chest  is  but  the 
complement  of  the  fortresses,  equipment,  and  system  of 
speedy  mobilization  that  constitute  the  safeguards  of 
German  unity 1.  On  the  other  hand,  the  general  argument 
against  state  reserves  is  a  forcible  one.  The  retention  of 
bullion  by  the  State  involves  the  loss  of  the  interest  that 
could  be  gained  by  its  productive  employment,  while  it  is 
quite  uncalled  for  in  any  country  with  an  efficient  system  of 
banking.  What  is  really  required  is  a  sufficient  dispos- 
able metallic  reserve  to  be  drawn  on  in  the  time  of  trial. 
The  state-treasure  policy  thus  invades  the  domain  of 
banking,  and  is  at  best  inadequate.  Three  weeks  of  war 
would  exhaust  the  store  of  £6,000,000  now  held  at 

1  Roscher,  §  124;  Wagner,  i.  173-7;  Cohn,  §  169. 


540  PUBLIC   FINANCE.  [BOOK  V. 

Spandau1.  It  is  so  hard  to  measure  the  precise  amount 
needed,  and  error  in  either  direction  leads  to  such  loss,  that 
the  policy  is  too  uncertain  in  its  effects  to  be  advisable. 
The  influence  of  state  hoarding  on  trade  and  prices  should 
also  be  considered.  The  withdrawal  of  a  large  mass  of 
money  means  lowered  prices,  and  is  so  far  a  hindrance  to 
the  development  of  trade,  and  the  ever-present  possibility 
of  its  sudden  use  has  a  disturbing  effect.  On  the  whole, 
then,  it  is  beyond  question  that  in  any  country  with 
modern  credit  facilities  the  formation  of  a  treasure  is  a 
mistaken  proceeding.  The  case  is  still  stronger  against  the 
use  of  a  reserve  in  the  form  of  securities.  They,  it  is  true, 
have  the  advantage  of  yielding  interest,  but  where  a  public 
debt  exists  it  is  better  to  use  this  available  property  for  its 
redemption.  To  borrow  with  one  hand,  while  lending  with 
the  other,  is  simply  introducing  an  additional  complication 
into  the  public  accounts,  without  any  corresponding  ad- 
vantage. The  repayment  of  a  portion  of  the  German  debt 
would  be  as  much  an  investment  as  the  policy  actually 
pursued.  But  the  method  of  investing  in  securities  is  not 
merely  useless  :  it  has  direct  disadvantages.  If  home 
securities  are  chosen,  the  State  is  drawn  into  the  business 
of  speculation  and  stockjobbing,  with  injurious  results  to 
trade.  The  interest  on  such  investments  may  apparently 
exceed  what  would  be  saved  by  paying  off  debt ;  but  this 
higher  yield  means  less  security  or  at  least  stability,  a  con- 
sideration that  leads  to  another  objection  to  such  invest- 
ments. The  aim  to  be  realized  is  the  possession  of  a  dis- 
posable fund  for  emergencies,  but  it  is  just  at  times  of 
emergency  that  stocks  are  certain  to  fall  in  value.  A  large 
sale  of  securities  by  a  government  at  the  outbreak  of  war 
would  force  down  their  price  and  make  the  process  of 
realization  a  costly  one.  Moreover,  the  funds  so  obtained 
would  be  equally  available  for  taking  up  a  loan.  To  come 
on  the  market  as  a  needy  seller  is  the  worst  possible  mode 
of  disposing  of  any  kind  of  state  property. 
1  Cohn,  §  169. 


CHAP.  I.]  STATE   HOARDING.  54! 

Where  foreign  securities  are  held  the  position  is  some- 
what different.  They  will  not  be  so  much  affected  by  the 
commencement  of  war,  as  they  possess  an  international 
market.  Political  difficulties  are,  however,  greater.  Should 
the  contemplated  war  be  with  the  Power  whose  debt  is  used 
as  an  investment,  the  question  of  retention  of  interest 
would  arise.  In  any  case  the  relation  between  the  investing 
and  lending  States  is  not  a  satisfactory  one  :  it  brings  a 
sovereign  power  into  the  domestic  affairs  of  another  State, 
and  in  case  of  readjustments  respecting  the  debt  may  cause 
grave  difficulties.  These  considerations  fully  support  the 
opinion  that,  speaking  generally,  the  system  of  state 
treasures  or  reserves  of  securities  is  indefensible  at  the 
present  stage  of  financial  development. 

Some  exceptional  cases  have  been  suggested,  but  even 
they  can  hardly  be  admitted  as  modifying  the  principle 
just  stated.  A  State  e.g.  may  have  no  public  debt  to 
redeem,  and  then  the  formation  of  a  reserve  may  appear 
desirable,  but  there  are  other  alternatives,  viz.  either  (i)  the 
remission  of  the  less  eligible  forms  of  taxation,  or  (2)  the  | 
increase  of  the  agricultural  or  industrial  domain  of  the 
State,  a  course  which  may  be  adopted  on  social  as  well  as 
economic  grounds.  Again,  the  interest  on  the  debt  may 
be  so  low  that  its  redemption  may  not  seem  commercially 
profitable  as  compared  with  investment.  The  objections 
to  state  dealings  with  capital  already  noticed *  are  too 
serious  to  be  set  aside  on  this  ground.  The  remission  of 
taxation,  though  it  seems  to  be  a  sacrifice  on  the  part  of 
the  State,  may  in  many  cases  be  the  best  course.  The  real 
source  of  state  revenue  is,  need  we  say  once  more,  the  j 
national  income,  and  judicious  remission  of  taxation  has 
a  beneficial  influence  on  the  growth  of  this  reservoir,  on 
which  the  State  in  the  last  resort  depends  for  its  tax 
receipts.  The  often-used  phrase  about  allowing  taxation 
'  to  fructify  in  the  pockets  of  the  taxpayers '  is  here  exactly 
applicable.  The  financial  power  of  the  State  rests  on  the 
1  Bk.  ii.  ch.  4.  §  i. 


542  PUBLIC   FINANCE, 

economic  development  of  the  people,  and  will  be  pro- 
portional to  it.  Any  special  resources  in  the  form  of 
money  that  may  be  required  are  best  procured  through 
the  normal  agency  of  bankers.  The  case  in  this  respect 
is  far  clearer  than  in  the  somewhat  parallel  one  of  manu- 
facture of  weapons  and  supplies,  since  the  question  of 
quality,  or  that  of  effectiveness  of  competition,  does  not 
arise. 

§  4.  Whatever  be  the  conclusion  as  to  special  and  ex- 
ceptional cases  of  state  reserves,  it  is  at  all  events  plain 
that  the  older  policy  of  hoarding  as  a  general  rule  of 
Finance  is  obsolete.  It  is,  in  fact,  on  its  ruins  that  the 
modern  phenomenon  of  public  debts  has  arisen.  From 
keeping  a  reserve  to  meet  all  emergencies  States  have 
passed  to  the  opposite  course  of  not  paying  their  working 
expenses.  The  problem  of  public  indebtedness  is  be- 
coming more  and  more  important,  and  giving  rise  to  serious 
questions.  The  remaining  chapters  of  the  present  book 
will  therefore  be  devoted  to  an  examination  of  the  different 
aspects  of  this  vital  part  of  modern  Finance. 


CHAPTER    II. 

PUBLIC  INDEBTEDNESS,  ITS  MODERN  DEVELOPMENT. 

§  1.  THE  development  of  public  indebtedness  accom- 
panied the  decline  of  the  older  system  of  treasures.  In  its 
present  form  it  is  essentially  a  creation  of  the  last  two 
centuries,  and  even  within  the  last  fifty  years  it  has  gained 
more  ground  than  in  all  preceding  periods.  The  causes  of 
its  rise  and  immense  expansion  must  be  sought  in  the 
special  circumstances,  both  political  and  social,  of  the  time. 

There  is  an  appearance  of  exaggeration  in  the  statement 
that  public  borrowing  has  only  come  into  existence  since 
the  end  of  the  seventeenth  century.  In  all  but  the  ruder 
societies  credit  has  been  more  or  less  employed,  and  we 
can  hardly  believe  that  the  governing  body  would  altogether 
neglect  its  use  in  times  of  need.  So  far,  however,  as  classical 
antiquity  is  concerned,  there  is  hardly  any  trace  of  loans 
to  the  State.  The  explanation  of  this  fact  lies  in  the 
characteristics  of  Greek  and  Roman  society1.  Instead  of 
borrowing  from  the  wealthy  citizen,  the  State  would  adopt 
the  more  drastic,  but  in  the  long  run  less  fruitful,  method 
of  levying  a  special  tax  on  him.  The  small  amount  of 
floating  capital  also  prevented  a  ready  recourse  to  loans. 
Compulsory  loans  or  the  farming-out  of  taxes  were,  in 
default  of  a  treasure,  the  favourite  methods,  to  which 
may  be  added  the  rarer  one  of  pledging  some  state  or 

1  Introduction,  Pt.  II.  §  i. 


5/J4  PUBLIC  FINANCE.  [BOOK  V. 

regal  possessions.  Temporary  credit  transactions  with 
contractors  were  the  nearest  approach  to  a  public  debt  in 
our  use  of  the  term l. 

§  2.  The  Middle  Ages  show  little  advance  on — in  some 
respects  they  fall  below — the  economic  position  of  the 
Roman  Empire.  The  strong  sentiment  against  usury  and 
the  feeling  that  it  was  beneath  the  dignity  of  a  prince  to 
borrow  from  his  subjects  2  both  tended  to  check  the  use  of 
the  royal  credit.  Where  it  was  exercised  the  quasi-private 
nature  of  the  feudal  state  system  comes  out  clearly.  The 
King  borrows  on  his  personal  credit,  or  on  his  domain, 
which  he  even  gives  in  pledge  as  a  security  for  payment. 
These  loans  were  usually  obtained  from  the  Church,  or  from 
foreign  bankers.  Hallam  tells  us  that  'in  1345,  the  Bardi 
at  Florence,  the  greatest  company  in  Italy,  became  bank- 
rupt, Edward  III  owing  them,  in  principal  and  interest, 
900,000  gold  florins.  Another — the  Peruzzi — failed  at  the 
same  time,  being  creditors  to  Edward  for  600,000  florins. 
The  King  of  Sicily  owed  100,000  florins  to  each  of  these 
bankers  V  Both  in  England  and  France,  these  borrowings 
grew  more  common  as  wealth  and  the  cost  of  government 
increased.  Francis  I  obtained  various  sums  through  the 
city  of  Paris,  which  kept  a  list  of  the  creditors  and  dis- 
tributed the  interest 4.  Appeals  to  Parliament  in  connexion 
with  loans  occur  as  early  as  the  reign  of  Richard  II.  Forced 
loans  were  tried  by  Edward  IV,  and  by  the  Tudors  in  the 
sixteenth  century.  The  pledging  of  taxes  as  security  is 
the  last  step  in  the  older  forms  of  borrowing. 

A  more  advanced  position  is  found  in  the  loans  of  the 
Italian  cities,  especially  Genoa  and  Venice,  which  raised 

1  Roscher,  §  130. 

8  Turpe  est  et  multunt  regali  reverentiae  derogat  a  suis  subditis  mutuare 
pro  sumptibus  regis  vel  regni ;  Thomas  Aquinas  (?),  De  Regimine  Principum, 
ii.  8.  The  approval  of  state  treasures  by  so  many  early  writers  was  a  dis- 
approval of  the  counter-method  of  loans. 

3  Middle  Ages,  iii.  340.  Loans  by  the  French  kings  can  be  traced  back  to 
1287.  Vuhrer,  Histoire  de  la  Dette  Publique,  i.  2  sq. 

*  Vuhrer,  i.  16-20. 


CHAP.  II.]  PUBLIC   INDEBTEDNESS.  545 

money  throagh  the  agency  of  banks  established  for  the 
purpose.  The  bank  of  St.  George  in  the  latter  city  was 
the  most  important  instance  of  this  system.  The  superior 
commercial  development  of  Italy  contributed  to  the  increase 
of  state,  as  well  as  private  credit,  and  more  especially  to 
complicated  dealings  in  the  farming  of  state  domains 
and  taxes. 

The  commercial  revolution  of  the  fifteenth  and  sixteenth 
centuries  which  depressed  the  Italian  towns  brought  those 
of  the  Low  Countries  into  prominence.  The  system  of 
state-borrowing  and  of  lending  to  foreign  countries  was  I 
engaged  in  by  the  Dutch,  who,  in  consequence  of  the  low 
rate  of  interest,  were  anxious  to  enlarge  the  field  of  invest- 
ment, and  therefore  undertook  most  of  the  limited  inter- 
national business  of  the  time,  such  as  the  carrying  trade 
and  public  loans.  Imitation  of  the  Dutch  methods  of 
commerce  and  Finance — so  powerful  an  influence  on  the 
English  policy  of  the  seventeenth  and  eighteenth  centuries 
— was  a  principal  cause  of  the  creation  and  advance  of  the 
English  funded  debt,  which  has  in  its  turn  been  an  example 
to  other  States. 

/"  §  3.  It  is  thus  plain  that  neither  ancient  nor  mediaeval  • 
Finance  possessed  the  modern  public  debt  system.  The 
latter  contained  the  germs  from  which  our  present  ex- 
pedients have  been  developed,  but  with  so  many  differences 
that  it  is  hardly  right  to  place  two  such  distinct  groups 
under  a  common  heading.  They  are  widely  separate 
species  of  a  comprehensive  genus.  The  increase  of  public  f 
debt  in  modern  times,  is  the  result  of  economical  and 
political  conditions  of  the  highest  interest  and  importance. 
From  one  point  of  view,  the  vast  indebtedness  of  States 
and  smaller  governing  bodies  is  due  to  the  transition  to 
4  credit  economy.'  Money,  as  a  medium  of  exchange,  has 
been  largely  superseded  by  the  use  of  credit  instruments. 
In  like  manner,  great  masses  of  property,  or  more  correctly 
the  evidences  of  its  ownership,  have  become  freely 
transferable.  The  shares  of  companies,  or  their  acknow- 

N  n 


546  PUBLIC    FINANCE.  [BOOK  V. 

ledgments  of  debt  are  very  readily  dealt  in.  Railways, 
banks,  and  other  industrial  undertakings  by  this  means 
increase  their  business  and  the  value  of  their  property.  It 
would  be  incomprehensible  if  the  greatest  of  co-operative 
organizations — the  State — declined  to  avail  itself  of  a  like 
expedient.  In  fact,  governments,  supreme  and  subordinate, 
strong  and  weak,  have  mobilized  their  credit  and  thereby 
increased  their  immediate  financial  power.  The  mechanism 
of  the  stock  exchange  has  remedied  the  weakest  point  in 
the  earlier  state-borrowing — the  absence  of  any  way  of 
quickly  realizing  the  capital  lent. 

The  connexion  of  public  debts  with  the  money  market 
is,  perhaps,  most  clearly  seen  in  the  modern  methods  of 
contracting  loans.  Whatever  be  the  particular  form  adopted, 
the  substance  of  the  operation  is  the  same,  and  amounts  to 
an  investment  of  capital  on  the  part  of  the  lenders,  carried 
out  in  nearly  every  case  by  the  special  class  of  dealers 
in  stocks.  To  the  investor,  there  is  no  difference  between 
taking  up  the  stocks  or  bonds  of  a  railway  and  those  of  a 
government.  In  the  cases  in  which  the  latter  are  contracted 
on  account  of  a  particular  undertaking,  the  resemblance  is 
even  closer.  A  loan  to  an  Australian  colony  for  railway 
construction  is  indistinguishable  from  one  to  a  company 
for  fresh  capital  outlay. 

Though  the  modern  money  market  affords  the  machinery 
for  continued  extensions  of  state-borrowing,  it  does  not 
give  the  motive  power.  The  amount  of  loan  transactions 
must,  it  may  be  said,  depend  on  the  conditions  of  supply 
and  demand,  but  then  this  comprehensive  formula  stands 
in  need  of  further  analysis.  The  reasons  for  the  expansion 
of  demand  are  discoverable  in  the  increase  of  expenditure 
in  modern  societies.  We  have  remarked  how  both  military 
and  civil  expenditure  are  growing,  and  also  that  some 
parts  of  this  outlay  are  at  once  uncertain  and  productive  of 
durable  advantage.  War  and  public  works  require  large 
immediate  expense,  and  their  full  benefits  are  not  reaped 
at  the  moment.  To  procure  sufficient  funds  by  taxation 


CHAP.  II.]  PUBLIC   INDEBTEDNESS.  547 

is  both  disagreeable  and,  on  the  surface  at  all  events, 
unjust.  The  financier  very  naturally  takes  what  he  knows 
to  be  the  most  convenient,  and  thinks  to  be  the  fairest  course 
in  appealing  to  capitalists  for  assistance.  It  is  true  that 
all  loans  have  not  this  plausible  ground  :  they  are  often 
due  to  weak  or  careless  Finance,  and  are  simply  a  mode  of 
staving  off  the  evil  day.  State-credit,  in  this  too,  is,  like  all 
modern  credit,  made  up  of  both  good  and  bad  elements, 
and  in  its  case  the  latter  are  often  the  more  powerful. 

As  the  increasing  cost  of  the  State  gives  us  the  motive 
for  its  greater  borrowing,  so  do  the  development  of  the  < 
capitalist  class  and  its  greater  influence  on  government 
explain  the  willingness  to  bring  forward  the  needed  supply. 
The  earlier  loans  were  either  obtained  by  force,  on  the  pledge 
of  specific  property  or  taxes,  or  finally  on  the  pledged  honour 
of  the  personal  ruler.  In  the  constitutional  epoch,  advances 
are  made  to  an  administration  over  which  the  well-to-do 
have  influence.  The  close  relation  of  the  English  debt 
with  the  Revolution  of  1688  and  the  maintenance  of  the 
system  introduced  by  it  is  well  known  *,  and  even  earlier 
the  Italian  cities  and  the  Dutch  provinces  were  under 
mercantile  influence.  It  is  unquestionable  that  the  de- 
velopment of  representative  government  and  its  control  of 
the  administration  have  helped  to  secure  a  larger  supply  of 
loans  than  would  otherwise  be  forthcoming.  At  the  same 
time  it  is  easy  to  overrate  the  significance  of  this  fact. 
The  mere  existence  of  constitutional  rule  does  not  suffice 
to  create  borrowing,  nor  its  absence  to  stop  it,  as  the  French 
debt  of  the  i8th  century  and  that  of  Russia  at  present  will 
suffice  to  prove.  A  powerful  class  in  the  possession  of 
disposable  wealth  will  be  in  a  position  to  act  on  the  most 
irresponsible  of  rulers,  and  a  prudent  absolutism  will 
recognise  the  wisdom  of  sustaining  public  credit.  Never- 
theless, the  advance  of  constitutional  government  and  the  j 
increase  of  indebtedness  have  been  coincident,  a  circum- 
stance due  to  the  fact  that  both  are  products  of  the  present 

1  Macaulay,  Hist,  of  England,  i.  141. 

N  n  2 


548  PUBLIC   FINANCE.  [BOOK  V. 

stage  of  development,  not  solely  because  *  the  monied 
interest  has  captured  the  machinery  of  government  V  The 
greater  attention  to  justice  that,  on  the  whole,  characterizes 
popular  government  naturally  operates  on  public,  as  on 
other  economical  relations. 

Nor  is  there  any  reason  to  doubt  that  the  change  is 
advantageous.  A  strict  observance  of  public  faith,  besides 
its  immediate  services  both  to  lenders  and  borrowers,  has 
a  further  influence  in  making  the  general  financial  ad- 
ministration more  regular.  It  may  be  that  in  some  cases 
the  policy  of  contracting  loans  has  been  carried  to  excess, 
or  the  funds  so  obtained  injudiciously  used,  but  the  repu- 
diation of  obligations  would  be  an  aggravation  of  the  evil. 
When  we  remember  the  vital  importance  to  a  State  of 
being  able  to  secure  assistance  through  credit  at  times  of 
pressure,  it  is  evident  that  anything  tending  to  strengthen 
the  guarantees  for  punctual  payment  is  and  must  be  for 
the  social  good. 

§  4.  The  powerful  effect  of  the  influences  that  favour 
indebtedness  is  shown  by  the  figures  of  every  stock  ex- 
change, and  by  familiar  facts  of  statistics.  Out  of  the,  in 
round  numbers,  1800  stocks  quoted  on  the  London  Market, 
340  may  be  fairly  described  as  public,  of  which  the  larger 
part  are  British.  Berlin  has  something  over  half  that 
number,  of  which  about  one-third  are  German2.  Paris 
has  a  still  larger  number.  We  may  say  that  any  State 
that  pretends  to  be  civilized  regards  the  creation  of  a  debt 
as  one  of  the  essential  marks  of  its  having  reached  that 
position.  So  does  every  colony  and  large  city.  The 

1  Adams,  Public  Debts,  9.     So  far  as  the  influence  of  the  monied  class  is 
directed  to  securing  public  credit  it  is  decidedly  beneficial. 

2  Cohn,  §§  535,  536.     '  At  the  present  time  over  one  hundred  States  that 
possess  practical  sovereignty  for  debt  purposes  offer  their  bonds  to  the  choice 
of  an  English  investor,  and  if  to  this  number  were  added  the  obligations  of 
^«a.s7-sovereignties,  the  London  market  would  show  over  150  sorts  of  public 
securities.     There  are  here  found  the   bonds  of  China,  Japan,  Persia,  Siam, 
Egypt,  Liberia,  Orange  Free  State,  Zanzibar,  besides  many  other  peoples  of  the 
Old  World.     The  South  American  States  are  nearly  all  represented.'    Adams,  5. 


CHAP.  II.]  PUBLIC   INDEBTEDNESS.  549 

latest  developments  of  municipal  life  are  shown  in  the 
issue  of  bonds  by  the  responsible  authorities.  Universality 
is  one  of  the  features  of  the  modern  debt  system,  and  it  is  / 
explicable  only  by  reference  to  the  conditions  noticed  in 
the  preceding  section,  together  with,  in  the  case  of  back- 
ward States,  the  influence  of  imitation. 

Public  indebtedness  is  remarkable,  not  merely  for  its 
universal  employment,  but  also  for  its  great  and  growing  ' 
amount.  According  to  a  careful  estimate,  the  national 
debts  of  European  States  in  1870  were,  in  round  figures, 
.£3.000,000,000,  in  1885  they  had  risen  to  .£4,600,000.000, 
or  an  increase  of  £1,600,000,000  in  fifteen  years1.  This 
enormous  sum  does  not  include  the  local  debts  that  are, 
if  we  may  judge  from  all  available  facts,  increasing  even 
more  rapidly.  The  national  debts,  strictly  so  called,  have 
been  reduced  both  in  England  and  the  United  States,  but 
the  heavier  local  debts  probably  leave  the  total  burden 
undiminished.  In  other  countries  both  divisions  of  debt 
have  been  growing  apace  in  such  a  manner  as  to  excite 
the  apprehension  of  reflecting  observers..  The  reality 
and  extent  of  the  danger  will  demand  examination  later 
on  ;  the  existence  of  the  circumstances  that  have  caused 
alarm  is  all  that  concerns  us  here,  but  even  at  this 
stage  of  the  inquiry,  it  is  well  to  notice  the  fundamental 
difference  between  the  two  classes  of  debt,  the  one  con- 
tracted for  non^economic  ends,  the  other  for  purposes  of 
reproductive  employment.  War  and  public  works  have 
been  mentioned  as  the  two  chief  causes  of  abnormal  outlay, 
and  loans  for  these  objects  belong  respectively  to  the  dif- 
ferent classes.  To  take  obvious  instances,  the  great 
addition  to  the  French  debt  from  the  war  of  1870—71 
cannot  be  regarded  in  the  same  light  as  the  indebtedness 
of  Prussia  and  other  German  States  for  railway  purchase 
and  construction.  The  former  involves  increased  taxation  ; 
the  latter,  if  prudently  applied,  does  not.  The  same  con- 
trast appears  in  the  case  of  the  English  National,  as  opposed 

1  Neymarck,  Les  Defies  Publiques,  86. 


550  PUBLIC   FINANCE. 

to  the  local  debt,  though  this  instance  suggests  the  necessity 
of  a  qualification.  Outlay  on  public  works  is  not  of  itself,  and 
apart  from  the  revenue  to  be  thence  derived,  different  from 
the  cost  of  war  or  other  unproductive  expenditure.  No 
readier  or  more  dangerous  mode  of  increasing  debt  can 
be  found  than  the  execution  of  works  that  are  not 
economically  productive.  Vague  assertions  of  indirect 
benefits  should  not  be  allowed  to  conceal  the  fact  that 
'  improvements '  of  this  kind  should  be  paid  out  of  income, 
and  cannot  be  regarded  as  investments  in  the  proper  sense 
of  the  term. 

§  5.  To  summarize  the  results  of  the  present  chapter: 
State  borrowing  appears  to  be,  in  its  leading  features,  a 
creation  of  the  constitutional  period,  built  upon  the  decay 
of  the  older  method  of  state  hoarding  and  having  its 
germs  in  the  Middle  Ages.  It  is  the  result  of  the  credit 
system,  combined  with  the  increase  of  public  expenses  and 
the  greater  security  for  observance  of  faith  to  the  state 
creditors.  Both  on  account  of  its  universal  .employment 
and  its  rapid  growth,  it  is  one  of  the  most  influential  factors 
in  modern  Finance,  and  one  whose  tendencies  and  actual 
effects  are  deserving  of  close  attention. 

To  form  a  just  appreciation  of  the  system  a  study  of  its 
history  in  the  more  important  countries  is  desirable ;  and 
we  shall  therefore  devote  some  space  to  this  side  of  the 
question  before  passing  to  the  more  theoretical  discussion. 


CHAPTER    III. 
THE  HISTORY  OF  THE  ENGLISH  DEBT. 

§  1.  THE  longest  and  in  many  respects  the  most  in- 
structive history  of  a  continuous  national  debt  is  that 
supplied  by  Great  Britain.  The  earlier  attempts  at 
systematic  borrowing  in  Italy  and  Holland  have  ceased  to 
have  any  practical  effect,  but  the  present  English  debt 
shows  an  unbroken  record  of  200  years.  The  Stuarts  had 
not  paid  much  respect  to  their  obligations,  and  were  quite 
prepared  to  repudiate  inconvenient  liabilities.  Still,  the 
expansion  of  the  public  economy  made  it  impossible  to 
avoid  some  floating  charges.  At  the  completion  of  the 
Revolution  in  1689  the  debt  stood  at  a  little  over  one 
million  (£1,054,925);  in  1691  it  had  risen  to  £3,130,000, 
bearing  an  interest  charge  of  £232,000.  An  Act  was  passed 
in  the  next  year  which  is  regarded  by  Macaulay  as  the 
origin  of  the  National  Debt,  and  which  provided  that 
£1,000,000  should  be  borrowed  on  the  security  of  the  beer 
and  other  liquor  duties.  The  yield  of  these  taxes  was  to 
form  a  fund  for  the  payment  of  interest,  with  the  proviso 
that  as  each  subscriber  died  his  annuity  was  to  be  divided 
among  thesurvivors  until  their  number  was  reduced  to  seven, 
when  as  each  annuitant  died  his  share  would  lapse  to  the 
State 1.  The  necessities  of  the  war  with  France  compelled 
further  borrowing.  The  funded  debt  is  first  mentioned  in 
1694.  In  that  year  the  Bank  of  England  was  founded, 

1  Macaulay,  Hist,  of  England,  ii.  398. 


552  PUBLIC    FINANCE.  [BOOK  V. 

and  lent  its  subscribed  capital,  £1,300,000,  to  the  Govern- 
ment at  the,  under  the  circumstances,  moderate  rate  of 
8  per  cent,  which  with  an  allowance  of  £4000  for  manage- 
ment, made  a  total  charge  of  £100,000  per  annum.  The 
connexion  thus  formed  between  the  Bank  and  the  Whig 
party  continued  as  an  influence  in  politics  for  several 
years  1. 

At  the  Peace  of  Ryswick  (1697)  the  debt  had  reached 
£31,500,000^  which  in  the  four  succeeding  years  of  peace 
was  reduced  to  £16,400,000.  The  East  India  Company 
had  lent  £3,000,000  at  8  per  cent,  in  1698,  but  this  was 
applied  to  paying  other  obligations.  There  was  thus  a 
reduction  of  about  £1,350,000  per  annum  during  peace,  as 
against  the  increase  of  £3,500,000  per  annum  during  the 
longer  war  period,  a  state  of  things  that  we  shall  find 
repeated  at  several  subsequent  stages  of  the  history. 
During  the  war  of  the  Spanish  Succession  the  debt  rose 
at  the  rate  of  over  £3,000,000  yearly,  until  at  the  Peace 
of  Utrecht  (1713)  it  came  to  £53,680,000  2. 

During  the  peace  period,  which,  with  a  couple  of  slight 
exceptions,  extended  from  1713  to  1739,  the  movement  of 
the  debt  was  not  uniform.  In  the  first  ten  years,  owing  to 
the  South  Sea  Bubble,  the  war  with  Spain,  and  the  method 
of  dealing  with  taxation,  the  debt  became  £55,300,000. 
Then  during  the  remaining  sixteen  years  of  peace,  with  the 
prudent  administration  of  Walpole,  some  reduction  was 
made,  so  that  in  1740  the  amount  was  just  under 
£47,000,000,  or  an  annual  diminution  of  £500,000. 

1  Macaulay,   Hist.  ii.  479 ;   Rogers,    First  Nine    Years  of  the   Bank  of 
England,  xiii,  xiv. 

2  One  curious  item,  the  oldest  of  all  and  hence  sometimes  regarded  as  the 
origin  of  the  debt,  was  added  in  1706.     The  Cabal  Government  of  Charles  II 
had  in  1671   seized  on  the  Goldsmiths'  loans  to  the  Exchequer,  a  proceeding 
known  as  the  '  shutting  of  the  Exchequer,'  and  had  simply  paid  interest  on  the 
amount  of  £1,328,000  detained.    In  1683  even  the  interest  was  stopped.    Legal 
proceedings  were  taken  by  the  sufferers,  and  after  a  series  of  trials  the.  House  of 
Lords  decided  in  their  favour  ;  but  by  an  Act  of  1699  it  was  provided  that  after 
December  25th,  1705,  one-half  of  the  amount  (£664,000)  should  be  added  to 
the  existing  debt,  to  bear  interest  at  6  per  cent. 


CHAP.  III.]      THE   HISTORY   OF  THE   ENGLISH   DEBT.  553 

§  2.  This  first  half-century  of  the  debt's  existence 
presents  several  points  of  financial  interest.  The  effect  of 
war  in  adding  to  debt,  to  be  a  little  reduced  in  the  succeed- 
ing peace,  has  been  noticed.  A  more  important  feature 
is  the  gradual  introduction  of  funded  debt.  Annuities, 
tontines,  anticipations  of  taxes,  and  floating  or  temporary 
liabilities  tend  to  be  absorbed  in  the  now  established 
form  of  capital  advances  for  interest.  The  various 
separate  debt  accounts  become  blended  in  one  indis- 
tinguishable charge.  'The  Aggregate  Fund  was  estab- 
lished in  3715  and  the  South  Sea  and  general  Funds 
in  the  following  year.  To  each  of  these  funds  a  variety 
of  branches  of  revenue  were  appropriated  .  .  .  and  each 
of  them  was  charged  with  the  payment  of  certain  annuities 
then  due  by  the  public.  The  united  surplus  of  these  funds 
formed  the  basis  of  the  sinking  fund  established  in  1716  V 
This  is  the  first  appearance  of  the  system  which,  at  a  later 
time  and  in  a  different  form,  was  regarded  as  the  most 
effective  agency  for  reducing  debt  The  primitive  sinking 
fund  usually  called  *  Walpole's '  was  really  due  to  Stanhope. 
It  proved  of  little  service  for  the  purpose  it  was  applied  to, 
as  it  depended  on  the  existence  of  a  surplus  whether  debt 
would  be  redeemed,  and  the  contraction  of  new  liabilities 
would  always  render  nugatory  the  payments  made  towards 
redemption. 

The  first  instances  of  the  process  known  as  '  conversion  ' 
also  occur  in  this  period.  In  1714  the  legal  rate  of  interest 
had  been  reduced  from  6  per  cent,  to  5  per  cent.,  and 
three  years  later  a  like  reduction  was  made  on  the  interest  of 
the  public  debt.  Again  in  1727  a  further  reduction  from 
5  per  cent,  to  4  per  cent,  was  made,  by  which  a  saving 
of  ^400,000  per  annum  was  realized.  The  effect  of 
Walpole's  financial  management  is  shown  by  the  high 
price  that  the  funds  had  reached.  A  3  per  cent,  loan 
issued  in  1727  stood  at  par  in  1736,  and  in  the  next  year 
at  107.  Under  such  conditions  it  is  plain  that  the  whole 

1  Hamilton,  64. 


554  PUBLIC    FINANCE.  [BOOK  V. 

redeemable  debt  might  have  been  reduced  to  3  per  cent, 
or  even  lower.  Political  expediency,  which  made  it  an 
object  to  favour  the  fundholders,  who  were  strong  sup- 
porters of  the  Hanoverian  dynasty,  prevented  this  useful 
measure. 

§  3.  The  war  of  1739-48  had  the  usual  effect  on  the 
state  indebtedness.  After  the  conclusion  of  peace  it  was 
found  that  £31,300,000  had  been  added  to  the  previous  in- 
cumbrances,  bringing  the  total  amount  to  over  £78,000.000. 
The  return  of  peace  gave  an  opening  for  the  application 
of  financial  management.  Pelham  in  1749  succeeded  in 
carrying  a  conversion  scheme,  which  may  be  regarded  as 
the  forerunner  of  the  modern  arrangements  of  the  kind. 
Interest  on  part  of  the  debt  was  reduced  to  3!  per  cent, 
for  seven  years,  and  3  per  cent,  afterwards.  Next  year 
that  on  the  remainder  was  reduced  to  3!  per  cent,  for 
five  years,  and  3  per  cent,  afterwards.  The  fundholders  at 
first  dissented,  but  the  high  price  of  stock  made  it  their 
advantage  to  accept  the  conditions.  The  consolidated 
3  per  cent,  stock  was  established  in  1751  and  existed  till 
the  conversion  of  1888  as  the  principal  part  of  the  debt. 
Its  price  in  1752  was  io6|,  the  highest  point  it  ever 
reached.  The  sluggish  condition  of  trade,  and  the  difficulty 
of  finding  good  investments  sufficiently  explain  this  high 
estimation  of  the  funds. 

Up  to  1 756  the  debt  had  been  reduced  about  £6,000,000, 
and  stood  at  £72,200,000  when  the  Seven  Years'  War  com- 
menced. Expenditure  at  once  rose  so  much  as  to  lead 
to  borrowing,  which  continued  until,  at  the  close  of  the 
war  in  1763,  the  funded  debt  was  £122,600,000  with  a 
floating  debt  of  about  £14,000,000.  The  consequences  of 
the  war  were  apparent  in  the  position  of  the  Exchequer 
for  some  years  afterwards.  In  1766  the  funded  debt  had 
risen  to  £129,500,000  with  a  further  unfunded  one  of  over 
£10,000,000.  The  succeeding  years  of  peace  allowed  of 
small  reductions,  coming  in  all  to  about  £10,000,000  in 
1775,  when  the  funded  debt  was  £125,000,000  and  the 


CHAP.  III.]      THE   HISTORY   OF  THE   ENGLISH   DEBT.  555 

floating  one  £4,150,000,  or  a  total  of  almost  £130,000,000. 
As  might  be  expected,  the  American  War  of  Independence 
added  seriously  to  this  burden.  At  the  conclusion  of 
the  Peace  of  Versailles  (1783)  the  total  debt  was  over 
£238.000,000,  or  an  annual  increase  of  about  £13,500,000. 
During  the  latter  part  of  the  war  the  strain  on  English 
credit  was  shown  by  the  low  price  obtained  for  the  loans 
of  that  period. 

Pitt's  first  administration  dates  from  1783,  and  its  earlier 
part,  which  may  be  called  the  peace  one  and  which  ended 
with  the  outbreak  of  the  war  with  France,  did  not  accom- 
plish much  in  the  direction  of  diminishing  the  capital  of 
the  debt.  In  1786  the  new  Sinking  Fund  was  established, 
and  by  1793  ^  nac^  redeemed  about  £10,250,000,  leaving 
a  net  capital  charge  of  £228,000,000. 

The  characteristics  of  the  second  half-century  of  the 
debt  history  are  found  in  the  great  growth  of  both  capital 
amount  and  interest  charge.  After  taking  into  account 
the  small  repayments  in  time  of  peace,  there  remains  a  net 
addition  of  £180,000,000  in  the  fifty-four  years  1739-1792, 
while  the  annual  payment  for  interest  had  risen  from 
£2,000,000  to  nearly  £9,500,000  in  the  same  period. 

The  terms  of  borrowing  varied,  but  up  to  1780  the 
loans  were  usually  issued  at  par  :  their  capital  therefore 
represented  the  amount  really  received,  though  they  were 
accompanied  by  small  annuities  for  terms  of  years  or 
other  special  favours.  Lotteries  were  also  combined 
with  the  loans,  subscribers  to  an  issue  of  stock  receiving 
tickets.  In  1781,  however,  a  loan  of  £12,000,000  was 
raised  at  the  rate  of  £150  of  3  per  cent,  and  £25  of  4  per 
cent,  stock  for  £100  paid,  or  a  total  capital  of  £21,000,000. 
The  result  of  adopting  this  system  was  to  add  nearly 
£25,000,000  to  the  nominal  capital  of  the  debt  without 
any  corresponding  receipt.  It  was  probably  due  to  the 
fear  entertained  by  subscribers  that  their  stock  would  on 
the  return  of  better  times  undergo  a  reduction  of  interest, 
and  also,  to  the  preference  of  the  government  for  a  large  3  per 


556  PUBLIC   FINANCE.  [BooK  V. 

cent,  stock.  As  mentioned  above,  the  sinking-fund  policy 
which  so  powerfully  affected  the  course  of  the  debt  was 
started  at  this  time,  though  its  influence  was  not  as  yet 
very  noticeable. 

§  4.  The  protracted  struggle  with  France,  first  under 
the  Revolutionary  government  and  afterwards  under 
Napoleon  I,  is  by  far  the  most  important  and  critical 
period  in  the  development  of  the  debt.  Without  the  ab- 
normal expenditure  of  the  twenty- three  years  1793-1815, 
the  sinking  fund  of  1786  would  have  automatically  wiped 
out  the  comparatively  small  capital  liability ;  and  the 
rapid  growth  of  British  industry,  free  as  it  would  have 
been  from  the  oppressive  taxation  that  Pitt  was  compelled 
to  impose,  would  have  made  the  operation  practically 
unfelt.  The  whole  financial  system  of  Great  Britain  has 
been  profoundly  affected,  but  the  present  debt  is  the  most 
prominent  of  these  results. 

From  the  outbreak  of  war  (1793)  to  the  peace  of  Amiens 
(1802)  loans  were  required  in  every  financial  year.  The 
amounts,  at  first  small,  rose  with  the  great  outlay  that  the 
continuance  of  hostilities  made  necessary,  till  in  1797  the 
capital  funded  was  over  £67,000,000,  the  actual  sum  ob- 
tained for  this  acknowledgment  of  debt  being  ^"44,000,000. 
As  nearly  £7,000,000  were  redeemed  by  the  sinking  fund 
in  that  year,  the  net  increase  of  debt  was  somewhat  over 
£60,000,000.  In  the  other  years  the  additional  debt  con- 
tracted was  not  nearly  so  large 1,  but  the  effect  of  the 

1  The  following  was  the  capital  funded  for  each  year  between  1793-1802  : 


See  Hamilton,  256. 


Year. 

£ 

1793 

6,250,000 

1794 

i5«676>526 

1795 

25,609,898 

1796 

41,303,699 

1797 

67,087,669 

1798 

30,000,000 

1799 

27,499,250 

1800 

29,045,000 

1801 

44,816,250 

1802 

41,489,438. 

CHAP.  III.]      THE    HISTORY   OF   THE   ENGLISH    DEBT.  557 

methods  pursued  was  shown  in  the  debt  at  the  conclusion 
of  peace.  It  was  just  £500,000,000,  an  increase  of  over 
£270,000.000  since  the  opening  of  war  in  1793,  l-e- 
£27,000,000  per  annum.  The  sinking  fund  had  paid  off 
besides  £57,000,000  of  the  debt  incurred,  which  must  be 
added  to  the  other  liabilities  of  the  time.  The  principal 
cause  of  this  great  addition  was  the  unwillingness  to  impose 
taxes  at  the  commencement  of  the  war.  For  the  four  years 
1793-7  the  total  amount  raised  in  taxation  was  £70,000,000, 
or  £17,500,000  on  the  yearly  average,  while  for  the  four 
years  1799-1802  it  was  £134,750,000,  or  an  increase  of 
92!  per  cent. 

The  short  peace  did  not  allow  of  any  reductions  in  ex- 
pense, and  on  the  recommencement  of  war  the  borrowing 
system  was  again  applied,  though  not  to  so  large  an 
extent.  At  the  opening  of  the  year  1816  the  funded  debt 
was  £816,000,000,  with  a  floating  one  of  £60,000,000,  show- 
ing a  total  increase  of  £360.000,000,  or  over  £25,000,000 
per  annum.  This  comparatively  satisfactory  result,  not- 
withstanding the  immense  expenditure  of  the  Peninsular 
War,  is  explicable  by  reference  to  the  much  heavier  taxa- 
tion imposed.  The  income  tax  was  in  full  operation,  and 
the  tax  revenue  rose  from  £37,250,000  in  1803  to 
£75.500,000  in  1815.  Mr.  Gladstone  has  asserted  that  the  J/ 
early  adoption  of  the  income-tax  would  have  saved  the 
necessity  of  borrowing,  since  the  annual  expenditure  apart 
from  the  debt  charge  would  in  the  later  years  have  been 
met  by  the  receipts  from  taxation l.  Whether  this  would 
have  been  possible  may  be  a  matter  of  dispute,  but  there 
can  be  no  question  that  the  system  of  loans  was  carried  to 
excess. 

The  facts  just  noticed  bring  out  strongly  the  defects  in 
the  method  of  Finance  during  this  trying  period.     They 
are  to  be  found  :  (i)  in  the  dislike  to  impose  sufficient  taxa- 
tion,  a   feeling   very   natural    on    political    grounds,    but  | 
indefensible  from  the  purely  financial  point  of  view.     The 

1  Financial  Statements,  16. 


558  PUBLIC    FINANCE.  [BOOK  V. 

instances  of  this  error  occur  chiefly  in  the  earlier  years. 
(2)  In  an  undue  reliance  on  the  purely  illusory  expedient 
of  a  sinking  fund,  which,  taking  the  most  favourable  view, 
increased  the  expense  of  management  and  deranged  the 
loan  market.  (3)  In  the  system  of  borrowing  at  a  higher 
nominal  capital  than  the  amount  actually  received,  thereby 
preventing,  or  at  least  hindering,  future  conversions  of 
debt. 

§  5.  The  French  wars  brought  the  English  debt  to  its 
maximum  point.  Since  that  date  there  has  been  some, 
though  insufficient,  reduction  of  it.  The  whole  course  of 
treatment  has  been  towards  a  sounder  and  more  careful 
policy,  guided  in  a  great  degree  by  the  influence  of  theory. 
The  criticisms  of  Hamilton  and  Ricardo  1  exposed  com- 
pletely the  sinking-fund  fallacy.  After  inquiry  it  was 
settled,  in  18(9,  that  a  real  surplus  of  £5,000,000  annually 
should  be  preserved  ;  but  after  various  difficulties  and 
changes,  the  sinking  fund^  as  a  positive  institution  was 
abolished  in  1829,  whatever  actual  surplus  existed  at  the 
end  of  each  financial  year  being  marked  off  for  redemption 
of  debt.  The  continuance  of  peace  enabled  the  method  of 
conversion  to  be  tried  with  effect,  though  the  field  of 
operations  was  limited  by  the  mistaken  policy  of  borrowing 
in  a  3  per  cent,  stock  with  a  high  nominal  capital.  In  1822 
£152,000,000  of  5  per  cent,  stock  was  converted  into  4 
per  cents.,  and  in  1830  further  reduced  to  3^  per  cents. 
The  old  4  per  cent,  stock  (£76,250,000)  was  reduced  to 
3^  per  cent,  to  which  rate  a  small  balance  of  4  per  cents, 
(about  £10,000,000)  was  also  reduced  in  1834. 

The  period  1830-40  is  one  of  the  most  discreditable  in 
English  Finance.  Hardly  any  fiscal  reforms  were  carried 
out,  and  the  debt  was  increased  by  budget  deficits.  Its 
amount  in  1841  was  £792,000,000,  nearly  £8,000,000  more 
than  in  1830.  The  firmer  administration  of  Peel  restored 
the  Finances.  A  surplus  was  procured  by  the  revived 

1  Hamilton's  Inquiry  was  published  in  1813,  and  Ricardo's  Essay  on  the 
Funding  System  in  1820. 


CHAP.  III.]      THE   HISTORY   OF  THE   ENGLISH   DEBT.  559 

income-tax,  and  a  fall  in  the  rate  of  interest  made  it 
possible  in  1844  to  convert  the  34  per  cent,  stock — 
£248,000,000 — into  35  per  cent,  for  ten  years  and  3  per 
cent,  afterwards.  The  further  effort  to  create  a  z\ 
per  cent,  stock,  made  by  Mr.  Gladstone  in  1853,  proved 
a  failure,  owing  to  the  rise  in  interest  and  the  pressure 
of  the  Crimean  War.  This  latter  event  supplied  another 
illustration  of  the  operation  of  war  on  indebtedness ; 
though  the  progress  of  wiser  views  on  the  treatment 
of  extraordinary  expenditure  was  evidenced  by  the  in- 
creased taxation  which  contributed  the  larger  part  of  the 
total  war  expenditure  (£70,000,000).  Since  that  time 
no  noticeable  addition  has  been  made  to  the  debt,  while 
the  growth  of  wealth  has  made  the  weight  of  the  existing 
charges  very  much  lighter.  Moreover,  though  no  heroic 
efforts  for  the  payment  of  debt  have  been  tried,  the  agen- 
cies of  the  reformed  sinking  fund,  the  terminable  annuities, 
and  conversion  have,  taken  together,  produced  a  decided 
effect  on  both  the  capital  and  interest  charges.  The 
recent  history  of  the  debt  is  in  fact  altogether  concerned 
with  them. 

§  6.  When  the  sinking-fund  theory  was  abandoned, 
there  still  remained  the  old  rule  by  which  the  surplus 
remaining  in  the  Exchequer  at  the  end  of  each  financial 
year  passed  to  the  Commissioners  for  the  Redemption  of 
the  debt.  If  large  surpluses  were  realized  year  after  year, 
this  would  be  a  satisfactory  method,  but  with  accurate 
balancing  of  receipts  and  expenses  it  is  of  little  service. 
A  considerable  excess  of  receipts  over  expenditure  gives 
rise  to  a  cry  for  remission  of  taxation  that  is  not  easily 
withstood.  Hence  the  need  of  marking  off  some  special 
funds  for  the  payment  of  debt.  Sir  S.  Northcote's  sinking- 
fund  measure  (1875),  by  which  an  amount  of  £28,000,000 
annually  was  permanently  set  apart  for  this  end,  is  the 
most  obvious  course.  Unfortunately  it  is  very  easy  to 
find  plausible  reasons  for  cutting  down  the  sum  so 
fixed.  Under  Mr.  Goschen  the  £28,000,000  became,  first 


560  PUBLIC   FINANCE.  [BOOK  V. 

£26,000,000,  and  now  only  £25,000,000,  a  sum  which  leaves 
a  very  small  margin  over  the  interest  and  terminable 
annuity  payments. 

The  method  of  redeeming  debt  by  the  use  of  terminable 
annuities  seems  on  the  whole  more  effective.  In  their 
commencement  public  debts  were  often  raised  by  annuities 
in  various  forms  *,  and  during  the  Revolutionary  and  Napo- 
leonic wars  the  system  of  adding  long  annuities  to  the 
funded  loan. was  adopted,  with  the  arrangement  that  they 
should  all  terminate  in  1 860.  By  this  system  a  consider- 
able relief  was  gained  when  the  date  of  expiry  was  reached. 
As  an  effective  method  of  redemption  fresh  terminable 
annuities  have  been  created,  and  an  equivalent  amount 
of  stock  cancelled.  The  largest  creations  were  in  1868- 
and  1884.  In  the  former  year  £24,000,000  of  savings- 
bank  stock  was  cancelled,  and  an  annuity  of  £1,760,000 
substituted.  In  1884  Chancery  stock  to  the  amount  of 
£40,000,000  and  over  £30,000,000  of  Post  Office  savings 
bank  stock  were  similarly  treated,  with  the  result  that  the 
funded  debt  has  been  brought  within  more  moderate  limits. 
In  1 860-1  its  total  amount  was  £788,970,799.  After 
thirty  years  it  stood  in  1890-1  at  £579,472,082,  or  almost 
£210,000,000  less.  On  the  other  hand  the  terminable 
annuities  had  risen  in  capital  value  from  £16,500,000  to 
£68,500,000,  an  increase  of  £52,000,000.  Within  the  last 
ten  years  the  agency  of  conversion  has  also  been  employed, 
and  with  success.  Mr.  Childers'  conversion  scheme  of  1884, 
by  which  2-|  or  af-  per  cent,  stock  might,  at  the  option  of 
the  holder,  be  obtained  for  the  existing  3  per  cents.,  with 
an  increased  capital  of  2  or  8  per  cent.,  according  to  the 
stock  chosen,  failed  to  attract.  Only  £21,648,000  of  stock 
was  offered  for  conversion  (more  than  half  of  it  from  public 
offices). 

The  failure  of  this  attempt  prepared  the  way  for 
Mr.  Goschen's  success  in  1888.  The  principles  adopted 
were :  (i)  the  creation  of  a  single  new  stock,  so  that  holders 

1  See  §  i,  and  ch.  6.  §  2  of  present  book. 


CHAP.  III.]      THE   HISTORY  OF  THE   ENGLISH   DEBT.  561 

were  not  confused  by  a  choice,  (2)  the  avoidance  of  any 
addition  to  capital,  (3)  the  use  of  the  most  effective  tech- 
nical methods,  such  as  conversion  without  expressed  con- 
sent where  this  course  was  legal,  commission  to  agents  for 
the  trouble  imposed  on  them,  and  small  concessions  in 
the  quarterly  payment  of  interest.  These  contrivances, 
together  with  the  persistent  low  rate  of  interest,  enabled 
the  whole  mass  of  stock  to  be  converted  or  paid  off.  A 
new  stock,  bearing  interest  at  2f  till  1903,  and  at  2i  from 
that  date  for  twenty  years,  has  taken  the  place  of  the  older 
3  per  cents.,  and  a  relief  in  interest  to  the  amount  of 
£1,400,000  annually  has  been  secured,  with  the  certainty  of 
an  equal  gain  in  1903.  As  an  incident  of  the  process  the 
floating  debt  has  become  larger,  and  amounted  in  1891  to 
.-£36,000,000,  or  more  than  double  the  normal  level.  As 
soon  as  the  condition  of  the  money  market  permits,  the 
greater  part  of  this  sum  will  probably  be  funded  or  turned 
into  a  terminable  annuity. 

§  7.  Looking  back  on  the  course  of  the  English  debt,  it 
is  very  plain  that  its  growth  has  been  altogether  due  to 
war  expenditure,  while  its  continued  existence  must  be 
largely  attributed  to  financial  weakness.  A  comparison  of 
the  debt  incurred  during  each  war  with  the  amount  paid 
off  in  each  succeeding  peace  establishes  this.  Over 
£600,000,000  was  added  in  the  great  war  (1793-1815); 
hardly  £75,000,000  was  paid  off  in  the  forty  years'  peace. 
The  Crimean  War  added  £40,000,000  ;  it  took  twelve  years. 
of  peace  to  pay  off  this  sum.  Greater  vigour  in  the  use 
of  terminable  annuities,  the  maintenance  of  larger  sur- 
pluses, and  above  all  a  wider  employment  of  direct  tax- 
ation in  the  form  of  an  income  tax  would  have  produced 
much  better  results.  The  pressure  of  the  debt,  however 
calculated,  is  too  light  to  justify  such  remissness.  When  we 
remember  that  each  million  of  debt  redeemed  means  the 
power  of  permanently  remitting  so  much  taxation,  we  can 
better  understand  the  advantage  of  a  vigorous  policy  in 
regard  to  it. 

O  o 


CHAPTER    IV. 

HISTORY  OF  THE  FRENCH  DEBT.     INDEBTEDNESS  IN 

OTHER  COUNTRIES. 

§  1.  THE  history  of  the  French  debt  is  naturally  divided 
into  two  parts  :  the  former  of  which  deals  with  the  borrow- 
ing under  the  Monarchy,  and  the  latter  with  that  under  the 
system  founded  during  the  Revolution.  The  history  of  the 
various  loans  previous  to  the  present  century  has  been  con- 
cisely described  as  *  a  history  of  bankruptcies  V  All  forms 
of  loans  were  tried;  and  all  possible  methods  of  evasion  were 
used  to  escape  repayment.  The  costly  wars  and  the  internal 
disturbances  of  the  country  partly  explain  this  course  of 
policy,  but  ignorance  of  financial  and  economic  conditions 
was  the  great  cause.  Forced  reductions  of  debt  and  de- 
basements of  the  currency  were  frequently  employed. 
An  extensive  revision  was  carried  out  by  Sully  in  1604, 
and  further  reductions  were  made  by  Mazarin.  Colbert's 
administration  introduced  some  system  into  this  part  of 
Finance,  but  after  his  death  the  older  confusion  reappeared. 
One  of  the  effects  of  the  Mississippi  scheme  was  a  consoli- 
dation of  the  diverse  forms  of  the  debt  and  a  reduction  of 
its  amount  to  a  sum,  estimated  at  1,700,000,000  livres, 
with  an  annual  charge  of  48,000,000  livres 2. 

The  reign  of  Louis  XV  (1715-1774)  was  marked  by  fresh 
loans  and  repeated  forced  reductions  of  the  capital  debt. 
In  1764  the  sum  of  the  different  liabilities  was  2,360,000,000 
livres  and  the  annual  charge  93,000,000  livres  :  at  his  death 
the  total  annual  charge  was  120,000,000  livres,  besides  a 
floating  debt  of  235,000,000  livres. 

1  Viihrer,  i.  320. 

2  Ib.  i.  181.     The  estimates,  however,  are  not  in  agreement,  ib.  i.  178. 


CHAP.  IV.]  HISTORY   OF  THE   FRENCH    DEBT.  563 

The  increasing  embarrassments  of  the  State,  which  might 
have  been  overcome  by  Turgot  had  he  remained  in  office, 
were  at  least  the  proximate  cause  of  the  summoning  of  the 
States-General  and  therefore  of  the  Revolution. 

According  to  the  report  submitted  by  the  committee  of 
the  Constituent  Assembly  in  November,  1789,  the  annual 
debt  charge  came  to  208,000,000  livres,  to  which  the  float- 
ing debt  had  to  be  added  l. 

§  2.  The  financial  difficulties  that  surrounded  the  revolu- 
tionary governments  led  to  large  issues  of  assignats,  and  to 
a  consolidation  of  the  public  debt  on  a  plan  arranged  by 
Cambon  (August,  1793).  By  it  all  debt  was  to  be  inscribed 
in  a  *  Grand-book,'  which  was  to  be  the  conclusive  evidence 
of  the  claim.  The  redeemable  debt  with  5  per  cent, 
interest  was  first  so  treated,  and  the  annuities  were  after- 
wards added.  The  result  was  the  creation  of  an  annual 
charge  of  £7,000,000  (174,716,000  francs),  or  a  capital  debt 
of  £140,000,000.  Unfortunately,  the  use  of  paper  money 
and  forced  loans  destroyed  whatever  benefit  this  systematic 
treatment  might  have  conferred,  and  the  straits  of  the 
government  led  to  the  measure  of  1797  (Vendfrniaire, 
Ann.  vi),  by  which  two-thirds  of  the  debt  was  *  paid  off'  (?)  in 
bonds  to  be  exchanged  for  land,  and,  after  some  reductions 
for  confiscations,  the  balance  in  annual  interest  was  ascer- 
tained to  be  £1,600,000  (40,216,000  francs),  representing  a 
capital  debt  of  £32,000,000.  About  £250,000  was  added 
to  the  interest  charge  by  the  Directory,  so  that  by  the 
opening  of  1800,  46,300,000  francs  was  the  annual  payment. 
The  financial  administration  of  Napoleon  I,  or  rather  of  his 
advisers  in  such  matters,  Gaudin  and  Mollien,  had  two 
great  merits.  It  resisted  all  temptations  to  issue  incon- 
vertible paper  money,  and  it  steadily  refused  to  meet  war 
expenditure  by  the  method  of  borrowing.  The  result  is 
to  be  seen  in  the  position  of  the  public  debt  at  the  close 
of  the  Empire.  In  April,  1814,  the  interest  had  risen  to 
63,300,000  francs  (£2,530,000).  After  allowing  for  the 

1  VUhrer,  i.  336. 
O  O  2 


564  PUBLIC    FINANCE.  [BOOK  V. 

debts  of  the  annexed  provinces,  the  net  increase  is  less 
than  £300,000  interest,  or  £6,000,000  capital.  In  qualifi- 
cation of  this  favourable  situation  the  immense  burdens 
imposed  on  France  and  other  countries  must  be  taken  into 
account.  The  Napoleonic  system  of  making  war  support 
itself  was  a  crushing  one  for  the  nations  subjected  to  its 
operation,  and  probably  far  heavier  than  a  well-managed 
public  debt  would  have  been  l. 

The  government  of  the  Restoration  had  a  series  of 
difficult  financial  tasks  to  face.  It  had  to  meet  the  war 
indemnity  levied  on  France  by  the  allies  ;  it  had  to  compen- 
sate the  emigrants  ;  and  it  had  to  take  up  the  unpaid  balance 
of  the  Imperial  outlay.  It  handled  these  various  problems 
with  honesty  and  firmness,  refusing  altogether  to  repudiate 
the  debts  of  the  Empire,  as  some  of  its  supporters  wished. 

The  principal  feature  of  debt  history  during  the  period 
1815-1830  is  the  creation  of  new  debts  to  meet  the 
indemnities  and  other  outlay.  The  total  amount  required 
for  these  purposes  represented  an  annual  charge  of  over 
£6,500,000  2.  The  creation  of  other  than  5  per  cent,  stock 
was  a  second  noticeable  point.  The  emigrants'  indemnity 
was  in  3  per  cent,  stock,  and  the  conversion  of  1824  was 
partly  in  4^  per  cents,  and  partly  in  3  per  cents.  At  the 
same  time  the  policy  of  redemption  was  effectively  carried 
on.  The  annual  charge  was  reduced  by  54,000,000  francs 
(£2,160,000),  and  conversion  removed  about  6,000,000 
francs.  These  sums,  with  a  few  small  escheats  to  the 
State,  practically  wiped  out  the  debt  existing  in  1814, 
leaving  that  created  by  the  Restoration  government 
(though  it  was  not  responsible  for  it)  as  the  actual  charge. 
From  another  point  of  view  it  may  said  that  in  the  fifteen 
years  there  was  a  net  increase  of  £4,000,000  interest.  The 
capital  of  the  new  loans  amounted  to  nearly  £132,000,000. 
less  the  sum  of  £43.000.000  redeemed,  or  a  net  capital 
increase  of  £90,000,000. 

1  On  the  debt  system  of  the  first  Empire,  see  VUhrer,  ii.  31-58. 
3  Viihrer,  ii.  160. 


CHAP.  IV.]  HISTORY   OF   THE   FRENCH    DEBT.  565 

The  Orleanist  government  commenced  its  career  by 
borrowing.  Its  first  loan  added  £280,000  to  the  interest 
charge,  and  was  issued  in  5  per  cent,  stock  at  84,  or 
nearly  6  per  cent,  on  the  actual  sum  received.  Another  loan 
of  £4,000,000  at  par  only  brought  in  £800,000.  Further 
loans  were  made  to  clear  off  deficits,  to  prepare  for  war, 
and  to  carry  out  public  works,  but  the  redemption  of  exist- 
ing debt  was  also  carried  on,  so  that  against  £1,500,000 
fresh  interest  created,  about  £1,000,000  was  redeemed, 
leaving  a  net  increase  of  £500,000  during  eighteen  years, 
but,  it  should  be  said,  years  of  profound  peace  during  which 
public  credit  stood  high  1.  The  position  of  the  stocks  over 
3  per  cent,  would  have  easily  admitted  of  conversion  without 
any  increase  of  capital  into  a  4  per  cent,  or  even  3^  per 
cent,  stock,  but  to  avoid  popular  hostility  this  evidently 
prudent  course  was  not  taken  2. 

The  Second  Republic,  short  as  was  its  duration,  added 
£2,120,000  to  the  interest  of  the  debt,  and  thus  brought 
the  total  charge  to  nearly  £9,200,000.  The  complete  dis- 
organization of  the  financial  system  and  the  hazardous 
experiments  of  the  provisional  government  sufficiently 
account  for  this  state  of  things. 

The  first  financial  performance  of  the  Second  Empire 
was  the  conversion  of  the  5  per  cent,  stock,  amounting  to 
£140,000,000,  into  4\  per  cent.,  with  a  gain  to  the  State  of 
£700,000  per  annum.  Less  than  £3,000,000  of  the  capital 
had  to  be  paid  to  dissenting  creditors.  Less  satisfactory  was 
the  management  of  the  war  expenditure.  The  total  cost  of 
the  Crimean  War  to  France  was  £66,000,000,  and  of  this 
sum  £61,500,000,  or  93  per  cent,  of  the  whole,  was  added 
to  the  debt.  Further  loans  followed  for  the  Italian  and 

1  In  1845  the  highest  and  lowest  prices  of  the  several  stocks  were  : — 

Highest.  Lowest. 

5  per  cents.  122-85  116-45 

4     »  Il6<25  i" 

4      „  1 10-5  106 

3      „  86-4  80-85 

Leroy  Beaulieu,  ii.  498. 

2  Viihrer,  ii.  238. 


566  PUBLIC   FINANCE.  [BOOK  V. 

Mexican  wars,  issued  much  under  par.  The  total  addition 
to  the  debt  between  1852  and  July,  1870,  was  represented  by 
an  increased  interest  charge  of  £5, 160,000.  Thus  the  annual 
payment  had  risen  to  £14,400,000,  and  the  capital  was  a 
little  less  than  £480,000,000.  Even  more  questionable  than 
the  large  borrowing  was  the  conversion  of  1862,  under 
which,  for  the  sake  of  a  premium,  the  4!  and  4  per  cent, 
stocks  were  to  be  converted  into  3  per  cents.,  with  a  pro- 
portionally increased  nominal  capital.  This  unjustifiable 
measure  gained  a  premium  of  £6,300,000  for  the  State, 
but  on  the  other  hand  it  increased  the  capital  of  the  debt 
by  almost  £64,000,000,  and  precluded  the  hope  of  further 
speedy  conversion l. 

§  3.  The  Franco-German  war  of  1870-1  is  as  marked  a 
period  in  the  development  of  the  French  debt,  as  the  war  with 
Napoleon  I  was  in  the  case  of  the  English  one.  Its  first 
effect  was  to  throw  an  enormous  burden  on  the  resources 
of  the  new  government.  In  addition  to  the  terrible  expense 
and  sacrifice  due  to  the  military  operations,  there  was  the 
indemnity  of  £200,000,000  to  the  Germans.  The  total 
expense  imposed  on  the  State  has  been  estimated  at 
£393,000,000.  Of  that  sum  about  £340,000,000  was  raised 
through  loans  of  one  kind  or  other.  Nearly  £60,000,000 
was  received  from  the  Bank  of  France  by  the  inconvertible 
paper  issues.  Over  £40,000,000  was  borrowed  in  1870,  and 
two  great  loans,  the  first  of  £80,000,000,  the  second  of 
£120,000,000,  were  raised  in  1871  and  1872  2. 

The  debt  incurred  to  the  Bank  of  France  was  cleared 

1  For  the  Finance  of  the  second  Empire,  see  Viihrer,  ii.  258-369. 
'J  The  loans  contracted  were  as  follows : 

Nominal  capital  Amount  of 

Amount  received.                 created.  interest. 

Date.             Millions  of  francs.      Millions  of  francs.  Millions  of  francs. 

August,  1870                        804                         1,327  39-8 

October,  1870                       208                            250  15 

June,  1871                         2,293                        2,779  J39 

July,  1872                          3,498                         4,140  207 

Total                      6,803                         8,496  400-8 
Cp.  Vuhrer,  ii.  538  ;  Leroy  Beaulieu,  ii.  573. 


CHAP.  IV.]  HISTORY   OF   THE   FRENCH    DEBT.  567 

off  by  annual  payments  of  £8,000,000,  and  afterwards  of 
£6,000.000,  until  in  1879  the  whole  was  discharged. 
In  other  respects  the  treatment  of  the  debt  has  been 
weaker.  Fresh  loans  have  been  contracted  for  public 
works  and  to  meet  budget  deficits.  M.  Freycinet's  plans 
accounted  for  a  large  part  of  this  increase  in  debt,  which 
was  raised  in  3  per  cent,  stock  terminable  after  seventy- 
five  years.  Thus  a  new  category  of  debt  was  added 
to  the  old  perpetual  rentes,  with  a  nominal  capital  of 
£160,000,000,  an  interest  charge  of  £4,800,000,  and  a 
further  charge  of  £[,000,000  for  redemption.  The  old  5  per 
cents,  have  been  in  1883  converted  into  4!  per  cents,  with- 
out increase  of  capital,  but  the  existing  charge  and  capital 
amount  are  very  heavy.  The  consolidated  debt  amounts  to 
£880,000,000,  with  annual  interest  of  £30,500,000.  When 
the  other  liabilities  are  added  we  get  the  enormous  total  of 
£1,295,000,000,  demanding  the  annual  cost  of  £50,000,000, 
together  with  about  £1,750,000  applied  to  its  redemption1. 
The  French  debt  is  by  far  the  largest  in  the  world,  being 
more  than  double  the  English  in  annual  charge,  and  over 
£600,000,000  greater  in  capital  amount.  This  great  accu- 
mulation of  debt  has  been  altogether  the  work  of  the 
present  century.  A  comparison  with  the  English  debt  will 
show  the  steps  by  which  the  latter  has  been  approached 
and  then  passed.  It  is  also  interesting  to  note  the  widening 
distribution  of  rentes  among  the  French  population.  In 
1830  the  holders  of  stock  were  only  125,000  in  number. 

1  The  constitution  of  the  French  debt  in  January,  1891,  was  as  follows  : — 

Interest.  Capital. 

Million  francs.  Million  francs. 

Perpetual  Rates  4^  per  cent.                        305.5  6,789 

„      3          »                              456  15.204 

Redeemable  3  per  cents.                                120-7  4>O23 

Floating  debt,  January,  1891                          21  I>°77 

Annuities  for  life                                             191  2>295 

Terminable  Annuities                                     in  3,ooo 


Total  1,205-2  32,388 

The  guarantee  of  60,000,000  francs  to  the  railway  companies  brings  the  annual 
payments  to  over  £50,000,000,  Leroy  Beaulieu  (5me  Ed.),  ii.  578-81. 


568  PUBLIC   FINANCE.  [BOOK  V. 

By  1869  they  had  increased  tenfold,  while  in  1881  they 
numbered  more  than  4,000,000.  The  great  mass  of  the 
debt  is  in  the  hands  of  Frenchmen,  and  divided  among  all 
classes  of  society.  This,  though  in  some  respects  desirable, 
hampers  a  finance  minister  in  such  processes  as  conver- 
sion or  repayment,  as  the  fundholders'  interest  is  at  once 
powerful  and  in  immediate  opposition  to  that  of  the  State. 

Some  alleviation  of  the  burden  may  in  the  future  be 
reasonably  expected  from  (i)  the  gradual  redemption  of  the 
3  per  cent,  stock  created  since  1878,  a  process  to  be  finished 
in  1952,  and  (2)  from  the  falling-in  of  the  railway  property, 
which,  as  we  saw,  will  happen  at  about  the  same  time1. 
But  the  benefits  to  be  thus  received  will  largely  depend  on 
the  methods  employed  in  the  next  sixty  years.  If  deficits 
are  allowed  to  continue,  if  injudicious  expenditure  is  carried 
on,  and  if  new  public  works  are  started,  it  is  certain  that  a 
fresh  debt,  perhaps  exceeding  that  now  in  existence,  will  be 
formed  by  the  middle  of  the  next  century. 

§  4.  Italian  unity  has,  from  the  financial  point  of  view 
at  least,  been  purchased  at  a  heavy  price.  Not  only  has 
the  weight  of  taxation  been  inordinately  increased,  but 
a  large  public  debt  has  been  contracted.  The  new  king- " 
dom  had  to  take  up  the  debts  of  its  predecessors,  and  from 
its  formation  up  to  1875  each  year's  budget  showed  an 
excess  of  expenditure  over  receipts  2.  The  use  of  loans, 
either  openly  or  by  the  issue  of  inconvertible  paper,  was 
the  inevitable  result.  The  latter  expedient  was  in-  force 
from  1866  to  1883,  when  it  was  removed  by  means  of  a 
loan  of  over  £29,000,000  in  specie.  Since  then,  however, 
there  have  been  further  deficits  and  an  increase  of 
liabilities,  so  that  the  total  capital  of  the  Italian  debt 
may  now  be  estimated  at  £520,000,000,  involving  an 
annual  charge  of  nearly  £25,000,000.  About  £6,000,000  of 

1  SeeBk.  ii.  ch.  3.  §  13. 

2  These  annual  deficits,  'which  began  with £15,000,000  for  1860  and  rose  to 
nearly  £29,000,000  in  the  war  year  1866,  became  less  than  £3.000,000  in  1871, 
and  only  a  little  over  £500,000  in  1874',  amounted  in  the  aggregate  for  the 
fifteen  years  1860-1874  to  £166,000,000. 


CHAP.  IV.]      INDEBTEDNESS   IN   OTHER    COUNTRIES.  569 

this  amount  has  been  an  inheritance  from  the  earlier  States, 
and  the  war  of  1 866  is  accountable  for  part  of  the  balance  ; 
but  the  great  source  has  been  the  budget  deficits  in 
ordinary  years,  that  have  gradually  accumulated  in  the 
present  heavy  burdens l. 

The  situation  of  the  German  States  is  in  sharp  contrast 
with  that  of  the  countries  already  considered.  They  are 
not  weighed  down  by  debt  charges,  and  they  have  the 
advantage  of  possessing  assets  against  a  good  deal  of  their 
apparent  liabilities.  As  appeared  in  connexion  with  the 
quasi-private  income,  the  retention  of  the  domain,  both 
agricultural  and  industrial,  has  been  more  marked  in 
Eastern  Europe,  and  this  difference  in  policy  has  affected 
the  position  of  the  public  debt. 

The  use  of  a  state  treasure  prevented  the  employment 
of  loans  by  Prussia  up  to  the  French  war  of  1792.  From 
that  time  the  public  necessities  were  too  pressing  and  some 
debt  was  contracted,  which,  by  1820,  came  to  nearly 
£33,000,000  with  a  yearly  charge  of  .£1,140,000,  and  a 
sinking  fund  which  brought  the  total  annual  cost  up  to 
.£1,500,000.  During  the  next  thirty  years  the  debt  was 
reduced  by  the  sale  of  public  property,  and  suitable  taxation, 
until  in  1848  the  interest  charge  was  only  £650,000. 
Between  1850  and  1870  there  were  increases  both  for 
public  works  and  war  expenditure,  that  by  the  end  of  the 
latter  year  brought  the  total  debt  to  £66,700,000.  Since 
then  fhe  purchase  of  the  railways  has  added  £153,000,000 
to  the  debt.  The  process  of  redemption  has  also  been 
carried  on  to  such  an  extent  that  there  is  an  actual 
diminution  of  the  non-productive  part.  Thus  since  1870 
the  railway  debt  shows  an  increase  of  over  £170,000,000, 
and  as  there  is  a  valuable  property  in  existence  by  its  use 
the  net  result  is  a  reduction  of  about  £16,000,000.  In  fact 
the  railway  receipts  have  in  some  years  more  than  sufficed 

1  Even  for  the  present  year  Signer  Luzzatti  estimates  for  a  trifling  deficit 
(£40,000),  but  his  view  is  generally  regarded  as  unduly  optimistic,  as  the  real 
excess  of  expenditure  is  likely  to  be  £1,250,000. 


570  PUBLIC   FINANCE.  [BOOK  V. 

to  meet  their  expenses,  and  the  whole  cost  of  the  interest 
and  sinking  fund  on  the  debt.  Alike  in  the  smallness  of 
its  amount  and  the  conditions  of  its  creation,  the  Prussian 
debt  is  less  oppressive  that  that  of  any  other  European 
country 1. 

The  four  important  secondary  states  of  Germany  are 
somewhat  similarly  placed.  The  whole  debt  of  Baden  is 
for  railway  construction,  as  is  the  far  greater  part  of  those  of 
Saxony  and  Wiirtemberg.  Two-thirds  of  the  Bavarian 
debt  was  incurred  for  the  same  object.  Though  the 
railways  hardly  meet  the  interest  on  their  part  of  the  debt, 
yet  so  far  as  they  contribute,  there  is  a  relief  to  the  tax- 
payers, and  if  liquidation  were  necessary,  there  would  be  a 
valuable  asset  to  assist  in  the  work. 

At  its  commencement  the  German  Empire  took  up  the 
debt  of  the  North  German  Bund,  which  consisted  in  loans 
for  the  war  of  1870—1,  amounting  to  over  £30,000,000,  and 
which  has  been  almost  entirely  paid  off.  New  loans  have, 
however,  been  issued  for  extraordinary  expenditure,  and 
they  have  brought  the  debt  to  over  £60,000,000.  The 
various  Imperial  funds  must  be  placed  on  the  other  side  of 
the  account :  they,  as  we  saw 2,  come  to  £30,000,000  and 
leave  only  about  the  same  amount  as  the  net  liability. 

§  5.  The  United  States  have,  again,  a  still  different  debt 
history  from  any  of  the  preceding  countries,  and  one  that 
suggests  some  points  of  interest.  After  the  formation  of 
the  Constitution,  Hamilton  prepared  and  carried  a  scheme 
of  funding  by  which  the  debts  due  to  France  and  Spain, 
those  owed  to  natives  by  the  Congress,  and  lastly  the  debts 
of  the  States,  were  combined.  The  total  debt  was  in  1791 
$75,000,000.  Notwithstanding  the  creation  of  a  sinking  , 
fund,  the  amount  due  increased  in  1796  to  $84,000,000. 
By  1812  it  was  reduced  to  $45.000,000.  The  war  with 
England  led  to  greater  outlay,  which  was  for  the  most  part 

1  For  the  Prussian  debt,  see  Cohn,  §§  488-94  ;  Neymarck,  3-6. 

2  See  Bk.  v.  ch.  i.  §  3. 


CHAP.  IV.]       INDEBTEDNESS    IN   OTHER  COUNTRIES.  57! 

met  by  loans  l.  In  1816  the  debt  had  reached  $127,000,000. 
From  that  point  there  was  a  steady  reduction,  till,  in  1835, 
the  total  debt  was  only  $37,000,  or  practically  nil.  During 
the  following  years  some  temporary  loans  were  made,  as 
e.  g.  for  the  Mexican  War  (1848),  and  the  total  debt  stood 
at  about  $60,000,000  when  the  Civil  War  broke  out 2. 

The  first  results  of  the  contest  were  a  serious  disturbance 
of  industry  and  commerce  and  a  great  increase  of  expendi- 
ture. No  adequate  tax  system  was  in  existence,  and  accord- 
ingly the  extraordinary  expenditure  was  at  first  almost  en- 
tirely met  by  the  use  of  credit.  Treasury  notes,  culminating 
in  inconvertible  paper  issues,  and  funded  debt  were  both 
employed.  It  was  not  until  1864  that  the  tax  revenue  was 
made  a  really  effective  contributory  to  the  war  expenses, 
but  from  that  date  its  development  was  rapid3.  Soon 
after  the  close  of  the  war  the  debt  touched  its  highest  point. 
According  to  Mr.  Bolles  :  '  On  the  ist  September  (1865) 
the  debt  recorded  on  the  books  of  the  treasury  reached  its 
maximum,  though  a  large  amount  of  war  obligations, 
pensions,  &c.,  were  not  yet  paid ' 4.  This  maximum  was 
represented  by  the  sum  of  $2,846,000,000,  of  which  only 

1  Out  of  $70,000,000  war  expenditure,  $64,300,000  was  met  by  loans,  and 
$5, 700,000  out  of  the  tax  receipts,  or  92°/0  and  8°/0  respectively.     Adams 
Public  Debts,  1 24. 

2  The  smallness  of  the  debt  in  the  period  1836-60  will  be  best  realized  from 
the  fact  that  its  capital  amount  rarely  exceeded,  and  in  several  years  was  much 
under,  the  annual  income  of  the  Federal  Government. 

3  The  following  table  shows  the  relation  of  loans  to  tax  revenue  in  the  years 
1861-66.     See  Adams,  132. 

Year.                Revenue.  Loans.  Total.  Percentage  of 

Million  Million  Million  loans  to  total 

dollars.  dollars.  dollars.             receipts. 

1861  41-5  23-7  65-2                     35 

1862  51-9  433-6  485-5                    89-5 

1863  H2.6  595-6  708-2  85 

1864  264-6  696  960-6  72-5 

1865  333-7  864-8  1198-5  74 

1866  558                       92-6  650-6  14 

*  Bolles,  Financial  History  (1861-1885),  306.  According  to  Prof.  Adams, 
'  the  interest-bearing  obligations  of  the  United  States  stood  at  their  maximum 
in  August,  1865,  amounting  at  that  date  to  $2,381,000,000.'  Public  Debts, 
249. 


572  PUBLIC    FINANCE.  [BOOK  V. 

$j,  1 1 0,000,000  was  funded  debt,  and  about  $460,000,000 
inconvertible  paper,  the  enormous  sum  remaining  — 
$1,276,000,000 — was  in  the  form  of  floating  debt,  most  of 
it  immediately  repayable.  The  cash  reserve  in  the  treasury 
was,  however,  only  $88,000,000,  leaving  net  liabilities  to 
the  amount  of  $2,758,000,000. 

The  great  financial  problems  for  the  Secretary  tP  the 
Treasury  were  therefore :  (i)  to  pay  off  or  fund  the  floating 
debt,  and  (2)  to  provide  a  permanent  scheme  for  the  future 
extinction  of  the  immense  liabilities  created  by  the  war. 
The  former  required  immediate  attention  and  was  success- 
fully managed.  In  a  little  over  two  years  the  floating  debt 
was  brought  down  to  $408,000,000,  and  the  inconvertible 
issues  reduced  by  over  $20,000,000,  while  new  funded  debt 
to  the  amount  of  $686,000,000  in  6  per  cent,  bonds  had 
been  issued.  The  temporary  obligations  were  cleared  off 
in  1868,  leaving  free  scope  for  the  repayment,  and  when 
possible  the  conversion,  of  the  funded  debt. 

A  sinking-fund  law  had  been  enacted  in  1862,  but  as  there 
was  no  real  surplus  till  1 866  it  was  inoperative,  and  in  fact 
the  payment  of  debt  has  not  been  carried  on  in  conformity 
with  that  law.  It  has  notwithstanding  been  on  an  immense 
scale,  as  the  following  short  table  proves. 

Year.  Capital  debt.  Interest  charge.  Rate  of  interest. 

Million  dollars.  Million  dollars. 

1865  (Sept.)       2756.4         151  6.34 

1868  (Nov.)       2484-9         126-4  5'8 

1884  (Nov.)      1408-5         47.3  3.92 

1889  (Dec.)       1056-1          41  3.7 

Thus  in  less  than  a  quarter  of  a  century  $1,700,000,000 
has  been  removed  from  the  capital  liability,  and  the  annual 
payment  has  been  reduced  by  $110,000,000.  This,  at  first 
sight,  extraordinary  result  has  been  attained  in  part  by  the 
high  credit  of  the  United  States  Government,  which  has 
enabled  the  6  per  cent,  and  5  per  cent,  bonds,  as  they  fell  due, 
to  be  reduced  to  4^  per  cent,  and  even  3^  per  cent.  A  more 
potent  cause  has  been  the  receipt  of  large  annual  surpluses 


CHAP.  IV.]       INDEBTEDNESS    IN    OTHER   COUNTRIES.  573 

which  were  the  natural  consequence  of  the  high  duties  on 
imports.  The  protective  system  has  been  in  this  way  the 
cause  of  the  repayment  of  the  war  loans.  From  the 
financial  point  of  view  it  is  plain  that  a  like  result  could 
have  been  reached  at  much  less  real  cost  and  sacrifice  if 
moderate  duties  had  been  used ;  but  then'  it  is  doubtful 
whether  in  that  case  the  policy  of  repayment  would  have 
been  so  firmly  adhered  to. 

At  all  events  the  position  of  the  Federal  debt  has  ceased 
to  be  a  prominent  element  in  financial  questions.  It  is 
rather  in  connexion  with  the  banking  system,  and  the 
method  of  dealing  with  bonds  whose  time  for  redemption 
has  not  yet  come,  that  the  debt  attracts  notice. 

One  of  the  methods  of  issuing  loans  in  the  United 
States  deserves  mention  here.  It  is  that  by  which  a 
minimum  and  a  maximum  time  of  repayment  are  fixed. 
Thus  what  are  known  as  the  'ten-forty  bonds'  were 
redeemable  at  ten  years  from  the  date  of  issue,  but  if  not 
then  paid  off",  they  could  not  be  redeemed  for  forty  years. 
This  system  is  at  present  a  serious  inconvenience,  as  the 
greater  part  of  the  debt  is  irredeemable,  and  therefore  the 
surplus  revenue  must  either  accumulate,  or  a  premium 
must  be  paid  to  the  holders  to  induce  them  to  accept 
payment 1. 

§  6.  The  debts  of  other  countries  need  not  be  considered 
at  any  length.  They  exhibit  the  same  general  features, 
though  each  group  of  States  shows  certain  peculiarities. 
The  Russian  debt  has  been  all  along  mixed  up  with  the 
use  of  inconvertible  paper,  and  is  affected  by  the  particular 
character  of  the  government.  The  Austro-Hungarian 
monarchy  has  three  separate  debt  accounts,  one  for  the 
Empire  and  one  for  each  of  the  parts.  But  one  general 

1  'With  a  sinking  fund  appropriation  of  $50,000,000  a  year,  we  shall  find 
ourselves  in  1896  again  without  any  debt  upon  which  the  appropriation  may  be 
expended.  In  what  manner  shall  the  machinery  of  debt  payment  be  managed 
from  1896  to  1907  ? '  Adams,  279.  The  Tariff  Act  of  1890  and  the  increased 
expenditure  seem  likely  to  prevent  the  existence  of  any  large  surplus,  and  this 
difficulty  will  therefore  not  arise. 


574  PUBLIC    FINANCE. 

fact  is  discernible,  viz.  the  almost  universal  tendency  to 
increase,  with,  it  is  to  be  feared,  in  some  cases  a  dangerous 
pressure  on  the  limits  of  national  solvency.  Any  attempt 
to  present  the  total  amount  of  indebtedness  at  a  given 
time  soon  becomes  misleading,  owing  to  the  growing 
liabilities  of  the  world. 


CHAPTER   V. 

THE  THEORY  OF  PUBLIC  CREDIT  AND  PUBLIC  DEBTS. 

§  1.  THE  peculiar  position  of  the  state  economy  and  the 
great  importance  of  public  borrowing  have  both  tended  to 
obscure  the  fundamental  truth  that  public  credit  is  but  one 
formjDf  credit  in  general,  and  is,  or  ougnTto  be,  regulated 
by  the  same  leading  principles.  Many  of  the  most  serious 
errors  in  this  department  of  Finance  have  been  due  to  the 
belief  that  the  State  in  its  borrowing  was  emancipated 
from  the  restrictions  that  prudence  imposed  on  the  in- 
dividual, and  that  it  might  safely  indulge  in  experiments 
that  would  soon  land  the  ordinary  citizen  in  bankruptcy. 

A  reference  to  the  nature  of  credit  shows  that  a  national 
debt  is  no  creation  of  wealth  ;  that  at  best  it  can  only,  in 
Bagehot's  phrase,  be  'additive'  and  give  greater  energy  to 
production.  Moreover,  this  position  is  only  attained  where 
the  credit  is  'productive,'  i.e.  used  in  assisting  the  creation 
of  fresh  wealth.  Where  the  resource  whose  use  is  obtained 
by  credit  serves  merely  for  some  object  which,  however 
important,  is  not  conducive  to  economic  production,  then, 
either  for  the  individual  or  for  the  State,  there  is  so  far  a 
loss  of  material  power.  Present  borrowing  of  this  latter 
kind  implies  less  income  in  the  future  until  the  loan  is 
repaid.  In  like  manner  the  limits  of  individual  and  public 
capacity  for  borrowing  are  determined  on  the  same  prin- 
ciple..  Each  person  can  only  borrow  on  his  disposable 
income  ;  a  State  or  subordinate  political  body  must  depend 
on  its  quasi-private  and  tax  receipts,  and  must  deduct  its 


576  PUBLIC   FINANCE.  [BOOK  V. 

necessary  outlay.  The  fund  on  which  a  public  body  can 
call  is  that  part  of  the  income  of  individuals  that  the  tax 
collector  is  able  to  appropriate,  and  it  is  on  its  amount  that, 
in  the  last  resort,  borrowing  power  depends.  / 

With  regard  to  the  mechanism  of  public  credit  the  same 
fact  exists.  The  State  that  enters  the  money  market  for 
a  loan  stands  on  a  precisely  similar  footing  to  the  indus- 
trial corporation.  It  must  conform  to  the  usual  course  of 
business,  and  it  must  submit  to  have  its  solvency  gauged 
in  just  the  same  way — by  the  price  at  which  it  can  obtain 
accommodation.  State  credit  is,  then,  we  may  fairly 
conclude,  one  branch  of  the  modern  credit  system,  and 
its  general  aspect  is  the  same  as  that  of  industrial  or 
non-industrial  credit,  respectively,  in  the  case  of  private 
economies. 

§  2.  But  though  this  general  conclusion  is  abundantly 
warranted,  and  may  be  usefully  employed  in  dispelling  cer- 
tain fallacies  on  the  subject,  there  remain  for  notice  some 
special  features  of  public  economy  that  give  a  peculiar 
colour  to  its  borrowing,  more  particularly  in  the  case 
of  the  central  government.  The  sources  of  individual 
wealth  reside  in  property  or  personal  capacity  to  earn  ;  it 
is  from  them  that  all  private  income  comes.  But  the 
State's  revenue  is  mainly  derivative ;  it  can  compel  the 
taxpayers  to  supply  it  with  funds.  The  method  of  borrow- 
ing is  therefore  naturally  suggested  where  heavy  taxation 
is  for  the  moment  undesirable,  and  is  further  encouraged 
by  the  fact  that  public  credit  has  the  advantage  of  resting 
on  a  broader  and  more  enduring  basis.  So  far  as  a  public 
domain  is  in  existence,  loans  may  be  regarded  as  virtually 
mortgages  raised  on  its  security,  as  many  early  loans 
actually  were  in  form  as  well  as  in  fact 

A  second  peculiarity  of  public  economy  is  the  difficulty 
of  sudden  retrenchment  in  its  case.  The  individual,  or  even 
the  industrial  company,  can  cut  down  expenses  if  receipts 
fall  below  their  former  level.  Their  expenditure  is  more 
elastic  than  that  of  the  State.  Decline  in  revenue  receipts 


CHAP.  V.]  THE   THEORY   OF   PUBLIC    DEBTS.  577 

will  not  justify  the  disbanding  of  the  army,  or  the  dis- 
missal of  civic  officials.  Consequently  where  under  any 
given  state  of  things  a  deficit  is  imminent,  and  new  taxes 
are  not  for  the  moment  available,  borrowing  is  necessarily 
prescribed. 

This  apparent  disadvantage  is  compensated  by  the 
greater  permanence  and  wider  field  of  public  economy. 
Whatever  may  be  the  disasters  of  a  few  years  \  the  normal 
feature  during  centuries  is  a  growth  of  national  wealth  and 
income  that  it  takes  more  than  ordinary  misgovernment  to 
dissipate.  We  may  readily  explain  the  special  forms  of 
state  loans  by  reference  to  this  circumstance.  The  great 
variety  of  stocks  and  the  complicated  conditions  for  re- 
payment could  only  be  adopted  by  a  body  of  assured 
continuance  and  growing  resources,  and  in  this  respect  the 
greater  industrial  corporations,  who  also  have  the  prospect 
of  long  existence,  present  an  instructive  resemblance. 

More  important  than  any  of  the  foregoing  is  the  peculiar 
legal  position  of  a  debtor  State.  Unlike  the  private  citizen 
or  corporation,  it  rests  within  its  own  discretion  to  say  / 
whether  or  not  it  will  meet  its  obligations.  The  creditor 
who  wishes  to  enforce  his  claim  against  a  State  has  not  at 
his  command  the  usual  legal  machinery,  the  necessity  of 
which  is  proved  by  the  frequent  recourse  to  its  aid.  A 
national  bankruptcy  is  a  strictly  legal  proceeding,  e.g.  an 
Act  of  Parliament  repudiating  the  National  Debt  would  be 
quite  as  valid  as  any  other  measure.  This  privilege,  which 
is  inherent  in  any  form  of  Sovereignty,  has  been  further 
extended  to— or  should  we  not  rather  say  retained  by — 
such  subordinate  political  bodies  as  the  '  States '  of  the 
American  Union,  which  at  one  period  of  their  history  ex- 
tensively availed  themselves  of  it2.  But  where  no  trace  of 
supreme  power  remains,  this  exemption  disappears,  and 

1  Thus  the  situation  of  France  in  1871  was  an  entirely  unexpected  one,  and 
could  be  no  criterion  for  judging  its  usual  position. 

2  The  'repudiations'  of  1840-50  have  deeply  injured    the   credit   of  the 
American  States. 

Pp 


578  PUBLIC    FINANCE.  [BOOK  V. 

the  ordinary  local  governments  are  as  amenable  to  legal 
process  for  recovery  of  debts,  as  any  other  kind  of  cor- 
poration l. 

The  Sovereign  State,  though  released  from  legal  liability, 
is  in  practice  under  very  powerful  inducements  to  honestly 
pay  its  way.  In  the  first  place,  where  its  creditors  are 
foreigners,  a  failure  to  fulfil  its  agreement  lays  it  open  to 
remonstrance  on  the  part  of  the  foreign  states  affected,  and 
possibly  to  even  more  rigorous  measures.  The  domain  of 
international  law  is  not  yet  a  settled  one,  and  it  is  quite 
conceivable  that  the  observance  of  obligations  to  alien 
lenders  may  be  one  of  its  rules  in  the  future.  With  regard 
to  native  creditors  there  is  an  obvious  interest  on  the  part 
of  the  State  to  do  nothing  that  will  injure  them,  and  what- 
ever political  power  they  possess  will  surely  be  used  in 
,.  their  own  defence.  Stronger  than  either  foreign  or  domestic 
influence  is  the  economic  sanction  that  protects  the  security 
of  loans.  The  repudiating  State  for  the  sake  of  a  temporary 
gain  shuts  itself  out  from  the  future  use  of  credit.  A 
national  bankruptcy  is  a  bar  to  any  later  borrowing  unless 
on  ruinous  terms.  The  American  'States*  have  never  re- 
covered the  shock  that  repudiation  inflicted  on  their  posi- 
tion as  borrowers.  The  best  support  to  the  policy  of 
paying  in  full  is  derived  from  the  economic  advantage  that 
a  reputation  for  honesty  secures  'in  the  long  run,'  and 
nations,  it  must  be  remembered,  have  a  far  greater  interest 
than  individuals  in  paying  attention  to  what  happens  '  in 
the  long  run.' 

§  3.  The  earlier  theories  on  the  subject  of  public  credit 
were  little  more  than  the  formal  statement  of  popular  pre- 
judices. Ideas  similar  to  those  of  Law  on  the  nature  of 
credit  were  somewhat  widely  diffused.  Thus  we  find  the 
public  funds  described  as  'a  mine  of  gold,'  and  state  loans 
as 'realized  alchemy'^.  Credit  was  looked  on  as  a  fresh 

1  It  must,  however,  be  remembered  that  the  method  of  procedure  may  often 
be  complex,  and  make  recovery  of  the  debt  difficult,  if  not  hopeless. 

2  The  former  is  Berkeley's  account,  Querist,  No.  233 ;  the  latter  phrase  is 
used  by  Pinto,  a  Dutch  writer.     Roscher,  §  125,  note  I. 


CHAP.  V.]  THE   THEORY   OF   PUBLIC  DEBTS.  579 

creation  of  wealth,  and  therefore  all  public  debts  were 
naturally  regarded  as  a  clear  addition  to  the  national  pos- 
sessions. Less  extreme,  but  just  as  erroneous  in  principle, 
was  the  assertion  that  the  debts  of  the  State  were  quite 
unimportant,  as  they  were  merely  owed  from  the  right 
hand  to  the  left1.  This  position — an  evident  deduction 
from  the  cruder  mercantile  doctrine — was  only  strictly 
applicable  to  the  domestic  debt,  and  was  so  limited  by 
Voltaire  and  Condorcet.  Foreign  creditors,  it  was  thought, 
did  take  money  out  of  the  country  and  therefore  injured  it ; 
the  resident  received  his  interest  and  spent  it  at  home. 
There  is  little  difficulty  in  exposing  this  fallacy,  which 
really  rests  on  the  same  ground  as  certain  views  about 
expenditure  and  taxation  already  rejected2.  The  action  of 
indebtedness  on  the  economic  system  cannot  be  altogether 
without  influence  or  effect,  nor  can  the  consumption  of 
masses  of  wealth  be  of  itself  beneficial.  The  confusion — 
not  altogether  unknown  in  later  writers — between  wealth 
and  evidences  of  ownership  is  the  reason  for  the  belief  that 
public  debts  are  an  addition  to  the  material  resources  of 
the  nation.  Though  in  some  respects  the  existence  of  debt 
may  be  the  cause  of  new  wealth  creation,  this  interpretation 
of  its  effects  must  be  dismissed  as  erroneous. 

§  4.  The  growth  of  debts  in  England  and  France  in  the 
]  8th  century  produced  a  very  different  opinion  on  the  sub- 
ject in  the  case  of  the  most  prominent  writers  on  political 
and  social  matters.  Montesquieu  did  not  hesitate  to  con- 
demn public  debts ;  he  refutes  the  idea  that  they  are 
advantageous,  and  approves  of  the  English  conversion  and 
sinking  fund3.  Hume  is  even  more  pronounced.  Though 
declining  'to  waste  time  in  declaiming  against  a  practice 
which  appears  ruinous,  beyond  all  controversy',  he  yet 
states  very  forcibly  his  objections,  some  of  which  had  been 

1  ^Les  dettes  (Tun  Etat  sont  des  dettes  de  la  main  droite  a  la  main  gaiiche,  dont 
le  corps  ne  se  trou-vera  point  affaibli'      Melon,  Essai  Politique,   ch.   23  in 
Economistes  Financiers  du  i8"le  silde,  749. 

2  Cp.  Bk.  i.  ch.  8.  §  6,  and  Bk.  iii.  ch.  2.  §  2. 

3  Esprit  des  Lois,  Liv.  xxii.  chs.  17,  18. 

P  p  2 


580  PUBLIC    FINANCE.  [BOOK  V. 

already  given  by  Montesquieu.  The  high  authority  of 
Adam  Smith  is  on  the  same  side.  He  speaks  of  'the 
enormous  debts  which  at  present  oppress,  and  will  in  the 
long  run  probably  ruin,  all  the  great  nations  of  Europe,' 
and  his  whole  discussion  of  the  funding  system  is  in  an 
extremely  hostile  tone1.  Both  Hume  and  Adam  Smith 
prophesied  that  national  bankruptcy  would  be  the  outcome 
of  the  continuous  English  borrowing.  The  course  of  events 
has  falsified  this  prediction,  and  later  writers  have  not 
hesitated  to  pronounce  it  fallacious.  According  to  Macaulay 
'  the  prophets  of  evil  were  under  a  double  delusion.  They 
erroneously  imagined  that  there  was  an  exact  analogy 
between  the  case  of  an  individual  who  is  in  debt  to  another 
individual,  and  the  case  of  a  society  which  is  in  debt  to  a 
part  of  itself.  .  .  .  They  were  under  an  error  no  less  serious 
touching  the  resources  of  the  country'2.  The  former  part 
of  this  criticism  is  more  than  questionable.  In  all  essential 
points  the  analogy  between  the  public  and  private  debtor 
does  hold  good,  and  should  never  be  lost  sight  of.  It  is 
no  doubt  true  that  the  material  power  of  England  was 
under-estimated,  but  then  it  was  impossible  to  foresee  the 
Industrial  Revolution  and  its  extraordinary  results.  The 
real  error  of  Hume  and  Adam  Smith  lay  in  generalizing 
from  a  too  limited  experience,  and  in  assuming  that  no 
new  forces  would  come  into  operation  ;  just  as  Macaulay 
has  probably  erred  in  the  opposite  direction  when  he  de- 
clares that  'a  long  experience  justifies  us  in  believing  that 
England  may,  in  the  twentieth  century,  be  better  able  to 
pay  a  debt  of  ;£i, 600,000,000  than  she  is  at  the  present  time 
to  bear  her  present  load.'  The  true  view,  which  regards  the 
debt  as  a  pressure  on  an  elastic  body,  implies  the  necessity 
of  measuring  both  the  weight  and  the  expansive  power  of 
the  object  on  which  it  presses. 

The  French  war  and  the  accumulation  of  debt  that  it 
caused  brought  forward  Sinclair  as  a  moderate  supporter, 

1  Hume,  « Essay  on  Public  Credit.'     Wealth  of  Nations,  387. 

2  History  of  England,  ii.  400. 


CHAP.  V.]  THE   THEORY    OF   PUBLIC    DEBTS.  581 

and  Hamilton  as  a  vigorous  critic,  of  the  system  of  borrow- 
ing. The  former  maintains  that  public  loans  are  the 
necessary  result  of  the  new  method  of  conducting  warfare, 
and  compares  their  advantages  and  disadvantages1.  Hamil- 
ton's work  expounds  with  remarkable  clearness  the  general 
rules  applicable  to  the  management  of  debt,  and  contains 
among  its  fundamental  principles  the  following  proposi- 
tion :  '  If  the  periods  of  war,  compared  with  those  of  peace, 
and  the  annual  excess  of  the  war  expenditure,  compared 
with  the  annual  savings  during  the  peace  establishment,  be 
so  related,  that  more  debt  is  contracted  in  every  war  than 
is  discharged  in  the  succeeding  peace,  the  consequence  is  a 
perpetual  increase  of  debt ;  and  the  ultimate  consequence 
must  be,  its  amount  to  a  magnitude  which  the  nation  is 
unable  to  bear'2. 

Now,  this  is  merely  the  statement  in  hypothetical  form 
of  the  condition  from  which  Adam  Smith  and  Hurne  drew 
their  dismal  conclusions,  and,  as  expressed,  it  is  absolutely 
incontrovertible.  A  nation  cannot,  any  more  than  an 
individual,  keep  adding  continually  to  its  liabilities  without 
at  last  coming  to  the  end  of  its  resources. 

The  influence  of  Hamilton's  teaching,  which  we  shall  have 
to  notice  again  in  respect  to  the  method  of  repayment3,  is 
plainly  traceable  in  Ricardo's  '  Essay  on  the  Funding  Sys- 
tem,' in  which  he  declares  his  preference  for  taxes  over 
loans,  chiefly  on  the  grounds  that  (i)  imprudent  expendi- 
ture will  be  checked  by  the  dislike  felt  for  heavy  taxation, 
and  (2)  the  probability  that  taxation  will  fall  on  revenue, 
while  loans  usually  come  from  capital.  Thus  the  main 
current  of  economic  opinion  was  decidedly  opposed  to 
state  borrowing. 

§  5.  A  comparatively  novel  view  of  the  effect  of  public  bor- 
rowing— though  the  germ  of  the  idea  is  in  Ricardo's  Essay 
— was  given  by  Chalmers,  who  in  his  Political  Economy 

1  Sinclair's  History  of  Revenue,  Pt.  ii.  ch.  2,  i.  350  sq. 

2  Hamilton,  9. 

3  Bk.  v.  ch.  7.  §  3. 


582  PUBLIC    FINANCE.  [BOOK  V. 

(1832)  argued  that  the  loan  system  was  economically  disad- 
vantageous and  oppressive  to  the  labourers.  His  contention 
was  that,  whatever  method  be  adopted,  the  whole  amount 
must  be  taken  within  the  period,  but  that  by  taxation  the 
charge  is  spread  over  the  whole  revenue  of  the  society, 
while  by  borrowing  it  is  placed  on  that  part  of  circulating 
capital  that  goes  to  reward  the  labourers,  and  as  a  neces- 
sary consequence  lowers  their  remuneration  to  the  benefit 
of  the  capitalists.  In  fact,  in  his  opinion,  the  system  of 
borrowing  puts  double  pressure  on  the  country  that  adopts 
it :  for  there  is  the  original  sacrifice  when  the  loan  is  con- 
tracted and  the  later  one  involved  in  the  payment  of 
interest  so  long  as  it  remains  outstanding,  and  finally  in 
its  repayment.  The  practical  conclusion  that  follows  from 
this  train  of  reasoning  is  of  course  that  no  borrowing 
should  ever  take  place,  and  that  all  expenditure  should  be 
met  out  of  current  revenue 1. 

It  is  highly  probable  that  Chalmers''  argument,  like  many 
of  the  ingenious  points  made  by  the  secondary  writers  on 
Economics  in  the  first  half  of  this  century,  would  soon  have 
been  completely  forgotten,  had  not  J.  S.  Mill  seized  upon 
and  repeated  it  in  an  early  chapter  of  his  Principles.  He 
asserts  that  the  doctrine  is  substantially  correct,  though 
it  needs  qualification  owing  to  the  possibility  of  the 
migration  of  capital  2 ;  and  in  a  later  part  of  his  treatise  he 
endeavours  to  assign  what  is  clearly  an  erroneous  criterion 
by  which  the  real  effect  of  any  actual  loan  could  be  deter- 
mined. 

This  curious  doctrine  is  evidently  based  on  an  applica- 
tion of  the  wages-fund  theory  in  its  most  rigid  form,  and 
the  general  abandonment,  or  at  least  qualification,  of  that 
dogma  would  of  itself  suggest  serious  doubts  as -to  the 
soundness  of  any  deduction  from  it.  As  we  shall  see 
in  a  later  section,  the  argument  is  almost  wholly  untena- 
ble, and  rests  on  a  very  partial  interpretation  of  some 

1  Chalmers,  Political  Economy,  ii.  71  sq. 

2  Principles,  Bk.  i.  ch.  5.  §  8,  Bk.  v.  ch.  7.  §  i. 


CHAP.  V.]  THE   THEORY   OF   PUBLIC    DEBTS.  583 

economic    conditions    peculiar   to   the   time   at   which    it 
originated. 

§  6.  The  exigencies  of  practical  Finance  had  made  the 
use  of  borrowing  so  general  that  the  more  practical  students 
of  the  subject  recognised  the  necessity  of  the  loan,  system. 
In  Germany  especially  is  this  view  to  be  found.  Jacob. 
Malchus,  Rau,  and  Nebenius,  while  all  dwelling  on  the 
evil  effects  of  loans,  accept  them  as  a  legitimate  expedient. 
The  arguments  of  Adam  Smith  were  blended  with  the 
results  of  positive  experience,  and  if  the  combination  was 
not  always  consistent,  it  at  least  had  the  merit  of  being 
eminently  common-sense l. 

The  same  judgment  can  hardly  be  passed  on  a  later 
German  theory,  originated  by  C.  Dietzel,  which  regards  the 
loan  system  as  the  true  mode  of  defraying  extraordinary 
expenditure.  This  position,  which  has  been  already  noticed 
in  another  connexion  2,  regards  the  State  as  being  a  part  of 
the  immaterial  capital  of  the  society,  and  any  unusual 
outlay  for  its  service  as  in  fact  an  investment.  To 
charge  to  revenue  what  is  really  due  to  capital  is  therefore 
a  mistake  in  public  book-keeping,  and  what  is  far  worse, 
an  injustice  to  the  actual  taxpayers.  From  this  point  of 
view  the  issue  of  loans  becomes  a  normal  part  of  the 
working  of  a  progressive  State.  Instead  of  regarding  the 
process  as  wholly  condemnable,  or  at  best  as  a  necessary 
evil,  we  should,  it  is  maintained,  look  on  it  as  both  just 
and  beneficial  3.  The  upholders  of  the  theory  have  arrived 
at  a  diametrically  opposite  position  to  that  occupied  by 
Chalmers,  and  one  which,  if  generally  adopted,  would  pro- 
duce very  serious  practical  consequences. 

§  7.  A  criticism  of  the  preceding  doctrines  supplies  the 
first  steps  towards  a  true  theory  of  public  debt.    The  idea  of 

1  On  these  writers  see  Cohn,  §§  511-14;  Roscher,  Geschichte,  §§  152,  160, 

195- 

2  Bk.  i.  ch.  8..§  i. 

3  See  C.  Dietzel,  System  der  Slaatsanlcihen,    Stein,  iv.  421 ;    Wagner,  i. 
144  sq. ;  for  statements  of  the  doctrine.     Cohn,  §§  515-7,  supplies  a  pointed 
criticism. 


584  PUBLIC    FINANCE.  [BOOK  V. 

Chalmers  that  the  system  of  borrowing  presses  too  heavily 
on  the  labouring  class  can  be  easily  shown  to  be  fallacious. 
In  the  first  place,  it  is  not  true  that  all  loans  come  from 
capital ;  they  may  be  obtained  from  savings  made  for  the 
purpose  1.  The  prospect  of  a  new  and  secure  investment 
is  a  stimulus  to  abstinence,  and  so  far  the  labourers  will  not 
suffer.  But  even  granting  this  erroneous  assumption,  it 
by  no  means  follows  that  loans  derived  altogether  from 
capital  are  taken  from  wages.  '  The  loan,'  says  Mill,  *  cannot 
have  been  taken  from  that  portion  of  the  capital  of  the 
country  which  consists  of  tools,  machinery,  and  buildings. 
It  must  have  been  wholly  drawn  from  the  portion  employed 
in  paying  labourers  2.'  He,  however,  offers  no  proof,  or 
attempt  at  proof,  of  this  proposition,  which  is  plainly  untrue. 
The  amount  taken  in  loans  comes  at  first  from  floating 
capital  that  would  otherwise  have  been  applied  to  fixed 
capital,  raw  material,  or  the  payment  of  workers  in  propor- 
tions determined  by  the  actual  circumstances.  Again,  the 
effect  of  the  employment  of  the  loan  is  altogether  disre- 
garded 3.  So  far  as  it  is  expended  on  hiring  services  it 
actually  tends  to  raise  wages,  so  that,  reasoning  from  the 
wages-fund  position,  what  is  taken  by  the  abstraction  of 
capital  is  restored  by  the  outlay  of  the  borrower  on  labour. 
The  utter  unsoundness  of  the  doctrine  that  all  loans  come 
from  wages  will  appear  from  the  absurd  result  to  which  it 
leads,  viz.  that  where  wages  are  at  the  minimum  it  would 
be  impossible  to  borrow  without  starving  some  of  the 
workers. 

The  facts  that  public  loans  are  in  many  cases  interna- 
tional, and  that  in  any  event  capital  is  capable  of  migrating 
from  country  to  country  are  allowed  by  Mill  to  have  weak- 
ened the  theory  that  we  are  considering.  If  loans  really 
come  from  the  international  market,  any  pressure  must  fall 

1  This  is  probably  true  of  part  of  the  French  loans  of  1871-2. 

2  Principles,  Bk.  i.  ch.  5.  §  8. 

3  Mill  briefly  refers  to  this  point  in  a  footnote  to  his  later  editions,  Bk.  i. 
ch.  5.  §  8  (6th  ed.). 


CHAP.  V.]  THE   THEORY   OF   PUBLIC    DEBTS.  585 

on  the  labourers  of  all  the  countries  which  contribute  ;  e.g. 
South  American  borrowings  would  have  injured  English 
labourers.  He  is  therefore  led  to  suggest  that  so  long  as 
public  borrowing  does  not  raise  the  rate  of  interest,  the 
labourers  are  not  damnified.  This  qualification  is  again 
unsound  ;  for  every  loan  must,  pro  tanto,  tend  to  raise  the 
rate  of  interest,  or  to  keep  it  from  falling.  There  is  no  line 
or  wall  of  separation  between  capital  for  home  and  that  for 
foreign  investment 1.  The  growth  of  international  relations 
has  rendered  antiquated  any  argument  from  the  hypo- 
thetical case  of  an  isolated  country 2. 

Such  considerations  as  the  foregoing  make  it  difficult  to 
understand  the  acceptance  of  the  doctrine  by  Mill.  The 
reasons  are  to  be  found,  partly  in  a  special  case  which 
seemed  to  give  it  support,  and  partly  in  a  portion  of  truth 
that  it  did,  in  fact,  contain.  The  great  instance  of  state 
borrowing  known  to  Chalmers  and  Mill  was  that  by  Eng- 
land in  the  period  1793-1815,  and  at  that  time  the  labourers 
were  suffering  while  the  capitalists  seemed  to  prosper.  The 
real  explanation  was  of  course  different 3,  but  the  conco- 
mitance of  the  two  series  of  facts  gave  a  plausibility  to  the 
theory  that  it  would  not  otherwise  have  had.  The  element  of 
truth  contained  in  it  was  that  public  borrowing  is  a  demand 
for  loanable  capital  which  helps  to  raise  its  value,  i.e.  the 
rate  of  interest.  Higher  interest  leaves  less  for  the  other 
shares  in  distribution,  and  as  the  employer  and  the  land- 
lord were  able  to  hold  their  own,  the  pressure  fell  on  the 
labourers;  but  this  could  not  be  ascribed  solely  to  state 
borrowing.  Taxation  that  really  fell  on  capital  would  have 

1  Mill,  Principles,  Bk.  v.  ch.  7.  §  i.     His  error  has  been  exposed  both  by 
Cairnes,  On  the  Best  Method  of  Raising  the  Supplies  for  War  Expenditure, 
10,  u,  and  by  Cliffe  Leslie,  Notes  (privately  printed),  17,  18. 

2  For  a  clear  statement  of  the  modern  mobility  of  loan  capital  see  Cunning- 
ham, British  Association  Report  (1891),  727. 

3  The  labourers'  sufferings  were  really  due  to  the  depreciated  paper  money, 
the  restrictive  laws  against  labour,  the  old  Poor  Law,  the  check  to  imports  by 
war,  and  the  industrial  revolution.     The  capitalists  gained  by  the  greater  use 
of  machinery  and  the  command  that  England  at  times  obtained  over  the  supply 
of  foreign  markets. 


586  PUBLIC    FINANCE.  [BOOK  V. 

the  same  effect.  We  cannot  therefore  adopt,  as  a  sweeping 
and  absolute  rule,  the  proposition  that  the  State  should 
never  at  any  time  obtain  funds  by  borrowing. 

§  8.  The  opposite  theory,  which  puts  forward  the  loan  as 
a  normal  process  of  meeting  expenditure  of  the  extra- 
ordinary class,  is  open  to  quite  as  weighty  objections.  The 
expenses  of  the  State  do  no  doubt  vary  from  year  to  year, 
and  any  sudden  increase  which  has  to  be  met  by  taxation 
may  prove  inconvenient,  but  on  the  other  hand  we  have  to 
remember  that  so-called  '  extraordinary '  expenditure  is 
itself  recurring  *.  To  treat  all  fresh  claims  as  extraordinary, 
and  to  meet  them  from  loans  is  an  easy  but  a  dangerous 
course.  There  is  also  the  further  consideration,  that  in  the 
long  run  the  revenue  from  economic  receipts  and  taxation 
must,  if  the  State  is  to  remain  solvent,  balance  the  outlay. 
So  far  as  debt  is  not  redeemed  it  is  a  permanent  charge  on 
the  revenue,  while  its  redemption  must  come  from  that 
source.  If  by  taking  a  somewhat  lengthened  period  we 
find  that  the  ordinary  state  revenue  meets  expenditure, 
there  is  no  reason  why — special  emergencies  excepted — it 
should  not  do  so  in  each  financial  year.  Sudden  changes 
in  taxation  may  be  more  or  less  inconvenient,  but  the 
arrangement  should  be  such  as  to  secure  some  elastic 
sources  of  revenue.  The  English  income-tax  is  capable  of 
discharging  this  function,  and  the  duties  on  commodities 
would  also  allow,  in  case  of  need,  of  large  increases.  The 
theory  that  so  markedly  separates  ordinary  from  extra- 
ordinary expenditure,  and  assigns  different  funds  for  their 
immediate  payment,  errs  by  unduly  emphasizing  a  non- 
essential  distinction. 

That  borrowing  is  justifiable  to  meet  '  reproductive '  out- 
lay is  a  further  part  of  the  theory,  which  is  at  once  true  or 
false  according  to  the  meaning  given  to  the  term.  Actual 
purchase  of  productive  property  or  creation  of  revenue- 
yielding  works  may  fairly  be  defrayed  by  loans.  The 

1  Cf.  Bk.  i.  ch.  8.  §  i. 


CHAP.  V.]  THE   THEORY   OF   PUBLIC    DEBTS.  587 

property  or  particular  work  may  be  regarded  as  the 
primary  object  of  the  debt,  and  is  at  hand  to  pay  the 
interest  on  it.  What  we  have  called  '  economic '  outlay 
has  a  claim  to  be  met  by  borrowing  that  does  not  hold  in 
respect  to  other  forms.  Taxation  imposed  for  the  purpose 
of  adding  to  the  domain  has  the  disadvantage  of  taking 
the  citizens'  wealth  for  the  purpose  of  accumulation,  and 
should  be  employed  sparingly  if  at  all.  To  meet  the  cost 
of  the  purchase  of  the  Prussian  railways,  or  even  the 
English  telegraphs,  by  immediate  taxation  would  not,  were 
it  practicable,  be  correct. 

This  concession  to  the  policy  of  borrowing  should  not  be 
stretched  to  include  the  cost  of  works  or  other  state  action 
that  yields  no  revenue.  Non-economic  expenditure  is 
primarily  to  be  met  out  of  the  annual  revenue,  and  unless 
it  can  be  so  dealt  with  ought  not  to  be  incurred.  National 
culture,  education,  the  promotion  of  social  progress  are  all 
most  desirable  ;  but  their  attainment  is  not  so  pressing  as 
to  need  the  use  of  borrowing  by  the  public  powers.  It  is, 
indeed,  true  that  much  of  state  expenditure  may  be  re- 
garded as  indirectly  productive,  and  as  adding  to  the 
national  income  in  the  future.  A  loan  for  the  purpose  of 
extending  education  or  for  improving  the  housing  of  the 
workers,  though  it  does  not  directly  provide  the  interest 
needed,  may  yet  so  increase  the  income  of  the  community, 
as  to  make  the  tax  receipts  greater,  without  any  increase 
either  in  rates  or  in  rigour  of  collection.  Regarded  in  the 
abstract  such  a  proceeding  seems  defensible :  the  real 
objections  to  it  arise  from  the  difficulty  of  application.  The 
results  of  expenditure  of  the  kind  are  hard  to  trace  or 
measure,  and  any  statement  respecting  them  must  rest  in  a 
great  degree  on  conjecture.  The  cost  of  the  loan  is  definite 
and  precise,  and  it  constitutes  a  real  burden  on  the  re- 
sources of  the  society.  Prudence  seems  accordingly  to 
suggest  that  borrowing  should  hardly  ever  be  adopted 
except  for  strictly  economic  expenditure,  and  then  only 
where  the  extension  of  the  state  domain  is  clearly  advisable. 


588  PUBLIC   FINANCE.  [BOOK  V. 

Political  and  social  conditions  come  in  to  limit  the  purely 
financial  action  of  the  public  powers1.  With  an  individual- 
istic organization  of  society  the  extension  of  public 
industries  has  naturally  to  be  kept  within  narrow  bounds, 
and  will  not  comprise  all  possibly  gainful  employments. 

One  great  objection  to  the  use  of  borrowing,  unless 
there  is  an  equivalent  revenue  obtained  by  its  application, 
is  the  necessary  curtailment  of  future  power  of  spending. 
Large  immediate  outlay  may,  as  we  shall  see,  be  requisite 
in  certain  cases,  but  for  most  of  the  usual  forms  of 
state  activity  the  funds  obtainable  by  taxation  are  quite 
sufficient,  and  can  be  continually  renewed.  Each  year 
meets  its  own  expense  without  causing  any  unevenness  in 
the  employment  of  the  fund  to  be  devoted  to  the  purpose. 
Heavy  borrowing,  on  the  other  hand,  if  persisted  in  for 
several  years,  so  cripples  the  ordinary  revenue  as  to  compel 
retrenchment  or  further  borrowing  on  disadvantageous 
terms,  until  the  limit  of  solvency  is  touched.  This  ap- 
propriation of  resources  that  will  surely  be  needed  in  the 
future  is  a  grave  weakness  in  the  borrowing  policy. 

§  9.  We  have  now  to  examine  the  real  effects  of  the 
system  of  borrowing,  and  for  this  purpose  it  is  requisite  to 
clearly  distinguish  between  the  mere  mechanism  of  a  loan, 
and  the  actual  economic  phenomena  that  are  its  outcome. 
Reduced  to  its  simplest  form,  a  loan  is  a  transfer  of  so 
much  of  the  wealth  of  private  holders  to  the  State  or  other 
public  body.  By  its  aid  the  borrower  obtains  the  disposal 
of  the  wealth  in  question,  and  as  a  consequence  affects,  or 
can  affect,  the  production,  distribution,  and  consumption  of 
wealth.  Thus  we  cannot  doubt  that  the  enormous  English 
loans  during  the  Revolutionary  and  Napoleonic  wars  had 
a  powerful  influence  on  the  economic  condition  of  the 
country,  and  we  must  believe  that  other  cases  of  borrowing 
so  far  resembled  this  particular  one.  The  application  of 
public  loans  is,  therefore,  to  be  taken  into  account  when 

1  See  Bk.  i.  ch.  i.  §  2  for  this  peculiarity  of  public  economy,  and  cp.  Bk.  ii, 
ch.  3.  §  21. 


CHAP.  V.]  THE   THEORY   OF   PUBLIC    DEBTS.  589 

seeking  to  estimate  their  effects.  If  contracted  for  a  purely 
industrial  purpose— say  railroad  construction — it  is  quite 
conceivable  that  their  influence  on  the  state  economy  may 
be  almost  imperceptible.  It  may  even  happen  that  the  actual 
application  will  be  the  very  one  that  private  capitalists 
would  have  selected  for  their  investment,  in  which  case  the 
public  credit  is  only  interposed  as  an  intermediary  between 
the  real  investors  and  the  industry  in  which  the  wealth  is 
placed.  There  are,  of  course,  the  additional  complications 
of  public  management,  and  the  special  rate  of  public 
borrowing,  but  in  essence  the  State  is  an  unnecessary 
additional  wheel  in  the  mechanism  l.  The  expediency  of 
borrowing  for  reproductive  purposes  accordingly  depends 
on  the  policy  to  be  pursued  in  reference  to  public  industries. 
Where,  as  in  Australasia,  there  is  a  decided  tendency  to 
keep  certain  classes  of  works  under  the  public  authorities, 
the  policy  of  borrowing  is  by  that  fact  justified  2. 

Turning  to  the  opposite  case  of  loans  applied  unpro- 
ductively,  the  first  effect  is  the  diminution  of  capital  and 
the  resulting  loss  of  wealth.  The  typical  example  is  that 
of  a  loan  for  carrying  on  war.  Its  use  is  turned  from  the 
support  of  productive  industry  to  the  purchase  of  com- 
modities and  services  to  be  employed  unproductively.  It 
is,  however,  important  to  note  that  this  distinction  is  not 
the  consequence  of  borrowing,  but  of  the  circumstances 
that  have  led  to  its  destination  :  it  results  from  the  extra 
expense,  not  from  the  particular  mode  of  meeting  it. 

But  granting  that  the  primary  cause  of  the  economic 
disturbance  that  accompanies  extensive  public  borrowing 
is  to  be  found  in  the  forces  that  have  produced  the  increased 
state  expenditure,  it  does  not  follow  that  the  system  of 
meeting  that  outlay  by  loans,  instead  of  by  taxation,  has  not 
a  serious  influence  on  the  economic  conditions  of  the  society, 

1  The  profitableness  of  such  a  method  is,  generally  speaking,  more  than 
doubtful,  but  the  Prussian  railways  may  again  be  cited  as  an  exceptional  case. 

3  The  present  depression  in  colonial  securities  is  a  good  illustration  of  the 
danger  that  attends  such  a  system,  and  of  the  need  for  caution  in  its  use. 


590  PUBLIC    FINANCE.  [BOOK  V. 

especially  as  there  are,  beyond  dispute,  some  pointed  con- 
trasts in  the  action  of  loans  and  taxes  respectively.  The  first 
of  these  has  been  already  emphasized  in  Chalmers'  theory. 
A  loan,  it  is  said,  comes  from  the  nation's  capital  ;  taxes 
from  its  annual  income ;  the  former  reduces  the  fund  that 
assists  production  ;  the  latter  curtail  immediate  enjoy- 
ments. By  borrowing  we  are  sacrificing  the  permanent 
interests  of  the  country  for  the  sake  of  immediate  relief. 
That  there  is  some  truth  in  this  position  is  undeniable,  but 
it  is  very  easy  to  exaggerate  its  importance.  The  sharp 
line  thus  drawn  between  revenue  and  capital  does  not,  in 
fact,  exist,  as  there  is  an  evident  reaction  of  each  on  the 
other.  Revenue  is,  indeed,  the  spring  from  which  capital 
is  fed,  or  rather  at  any  given  time  '  revenue '  and  '  capital ' 
are  but  names  for  different  applications  of  the  collective 
wealth  of  the  community 1.  Large  public  borrowing  stimu- 
lates saving,  and  thereby  checks  expenditure  on  enjoy- 
ments :  oppressive  taxation  reduces  the  fund  from  which 
new  savings  are  made,  and  so  far  hinders  the  accumulation 
of  capital.  A  loan  for  unproductive  purposes  is  not  always 
a  pure  destruction  of  national  capital.  Though  the  debt 
charged  on  the  national  wealth  is  increased,  there  may  be 
some  compensation  in  the  larger  available  assets. 

A  second  point  of  contrast  is  in  favour  of  borrowing.  A 
loan  is  voluntary,  and  supplied  by  willing  givers  :  taxation 
is  levied  on  the  willing  and  unwilling  alike,  and,  if  heavy, 
is  sure  to  cause  discontent.  The  former  has,  therefore,  the 
advantage  of  putting  less  immediate  pressure  on  the  indi- 
vidual citizen,  though  on  the  other  side  there  are  the  future 
charges,  and  the  effect  on  borrowers  and  labourers  through 
the  increased  value  of  loanable  capital. 

Thirdly,  the  equitable  distribution  of  heavy  taxation  is 
not  easily  attained.  Where  very  high  imposts  are  laid, 
some  classes  and  persons  are  likely  to  suffer  unduly.  The 
division  of  the  charge  over  a  longer  time  by  the  use  of 

1  Cp.  Bk.  iii.  ch.  2.  §  5,  and  for  a  discussion  of  the  conception  of  revenue 
see  Marshall,  Principles,  Bk.  ii.  ch.  6. 


CHAP.  V.]  THE   THEORY   OF   PUBLIC   DEBTS.  59! 

borrowing  makes  the  proper  apportionment  of  the  burden 
far  easier,  and  more  especially  allows  of  sufficient  time  for 
its  full  consideration.  Great  and  sudden  changes  in  taxa- 
tion— particularly  if  they  are  increases — are  always  evil. 
Some  time  is  needed  for  the  definitive  incidence  of  a  tax 
to  become  settled  ;  a  truth  exaggerated  in  the  doctrine  of 
Canard,  but  still  having  much  weight  in  this  special  con- 
nexion. To  avoid  disturbance,  it  might  even  be  said  that 
taxation  should  always  be  maintained  at  a  level  sufficient 
to  meet  the  average  outlay  over  a  long  period.  Excessive 
expenditure  in  some  years  would  be  compensated  by  the 
surpluses  of  others,  and  complete  equilibrium  between  in- 
come and  outgoings  would  be  the  final  result.  The  utter 
impossibility  of  forecasting  the  future  course  of  expenditure 
makes  this  method  quite  impracticable.  The  effort  to  carry 
out  such  a  plan  would  end  in  the  accumulation  of  debts 
that  would  not  be  paid  off  in  the  prosperous  periods.  But 
though  so  thorough  an  adjustment  is  not  to  be  reached,  the 
diffusion  of  the  burden  of  loans,  in  opposition  to  the  imme- 
diate pressure  of  taxes,  is  a  difference  to  be  taken  into 
account  in  considering  their  respective  operations. 

The  contrast  may  also  be  turned  the  other  way.  Just 
as  direct  taxation  is  often  advocated  on  the  ground  that 
it  brings  the  real  cost  of  the  State  more  clearly  before 
the  contributors,  so  has  the  policy  of  paying  all  expenses 
out  of  taxation  been  regarded  as  'a  salutary  and  wholesome 
check '  on  the  natural  disposition  to  indulge  in  extravagant 
outlay.  To  make  things  smooth  for  the  present  at  the 
cost  of  the  future  is  not  the  duty  of  the  wise  and  far-seeing 
statesman. 

Loans  for  war  expenditure  are  particularly  open  to  this 
objection,  and  it  was  in  reference  to  them  that  Mr.  Gladstone 
pronbunced  his  forcible  condemnation  of  the  policy  of  bor- 
rowing1. There  can  be  no  doubt  that  the  immediate 

1  '  The  expenses  of  a  war  are  the  moral  check  which  it  has  pleased  the 
Almighty  to  impose  upon  the  ambition  and  the  lust  of  conquest  that  are  in- 
herent in  so  many  nations.  There  is  pomp  and  circumstance,  there  is  glory  and 


592  PUBLIC    FINANCE.  [BOOK  V. 

increase  of  taxation  will  to  some  extent  damp  the  ardour 
of  a  people  for  war,  which,  however,  is  sometimes  a  doubt- 
ful advantage.  From  the  point  of  view  of  the  administration 
the  method  of  borrowing  is  decidedly  preferable ;  as,  where 
taxes  have  to  be  imposed,  it  is  compelled  to  exercise 
economy  and  to  keep  expenditure  within  bounds,  while  by 
the  use  of  loans  it  may  even  secure  favour  with  the 
monied  interest,  and  at  the  same  time  become  popular 
among  other  classes  by  profuse  outlay. 

Lastly,  there  is,  or  may  be,  an  opposition  between 
borrowing  and  taxation  in  respect  of  their  ultimate  in- 
cidence. With  proportional  taxation  increased  to  meet 
abnormal  expenditure  there  is  very  heavy  pressure  on  the 
receivers  of  industrial,  or  more  generally  of  temporary, 
incomes,  which  may  not  be  in  existence  when  the  burden  is 
removed.  In  the  succeeding  period  of  low  expenditure  the 
same  class  of  incomes  escapes  lightly,  though  the  recipients 
have  benefited  by  the  sacrifices  previously  incurred.  This 
failure  in  just  distribution  between  different  times  may  be 
met  by  the  loan  system,  the  interest  on  debt  being  paid  by 
those  who  would  otherwise  have  escaped  altogether,  but, 
as  we  saw  ],  it  can  also  be  avoided  by  the  use  of  taxes 
falling  on  property,  such  as  e.g.  the  succession  duties,  or 
direct  duties  on  realized  wealth,  though  this  course  is  sur- 
rounded by  difficulties  of  its  own. 

§  10.  So  far  the  contrast  of  the  borrowing  and  the  tax 
systems,  as  modes  of  meeting  extraordinary  expenditure, 
does  not  seem  to  lead  to  any  very  decisive  result.  Some 
broad  considerations  favour  the  use  of  taxation :  others 
of  no  slight  weight  give  support  to,  at  least,  a  moderate 

excitement  about  war,  which,  notwithstanding  the  miseries  it  entails,  invests  it 
with  charms  in  the  eyes  of  the  community,  and  tends  to  blind  men  to  those  evils 
to  a  fearful  and  dangerous  degree.  The  necessity  of  meeting  from  year  to  year 
the  expenditure  which  it  entails  is  a  salutary  and  wholesome  check,  making 
them  feel  what  they  are  about  and  making  them  measure  the  cost  of  the  benefit 
on  which  they  may  calculate.'  Hansard,  March  6th,  1854.  Cp.  the  useful 
criticism  in  Northcote,  Financial  Policy,  259-264. 
1  Bk.  iii.  ch.  3.  §  ii. 


CHAP.  V.]  THE  THEORY  OF  PUBLIC   DEBTS.  593 

use  of  loans.  But,  in  truth,  there  is  not  quite  free  choice. 
After  expenditure  has  passed  a  certain  point,  borrowing 
becomes,  if  not  necessary,  at  all  events  highly  expedient. 
The  productiveness  of  every  separate  tax  has  its  limits,  and 
so  has  that  of  the  tax  system  taken  as  a  whole.  Each 
additional  charge  implies  a  more  than  proportional  sacri- 
fice by  the  contributors  and  greater  difficulty  in  getting  in 
revenue  on  the  part  of  the  State.  The  existence  of  a  law 
of  '  diminishing  returns '  in  public  receipts  is  a  valid 
ground  for  the  employment  of  loans,  when,  all  things 
considered,  they  will  be  less  onerous  than  further  taxation. 
It  appeared  that  15  per  cent,  was  probably  the  largest  pro- 
portion of  the  national  income  that,  under  ordinary  condi- 
tions, could  be  taken  for  the  state  services,  and  though 
the  limits  of  productivity  are  capable  of  being  expanded  at 
times  of  trial,  we  can  hardly  doubt  that  an  income-tax  of 
five  shillings  in  the  pound  would  prove  too  much  for  even 
the  United  Kingdom. 

This  principle  admits  of  more  extended  application.  If, 
when  taxation  is  exhausted,  a  loan  has  to  be  employed,  it 
is  evident  that  before  that  extreme  point  is  reached, 
borrowing  may  advantageously  be  combined  with  taxation, 
and  that  the  exact  extent  to  which  it  may  be  used  will 
depend  on  a  complicated  calculation  of  the  different  elements 
involved.  The  cost  of  taxation,  varying  as  it  does  accord- 
ing to  its  forms  and  amount,  must  be  weighed  against  the 
burden,  present  and  future,  of  the  loan.  This  is  no  easy 
matter,  and  it  can  only  be  approximately,  worked  out,  if, 
indeed,  it  has  not  to  be  decided  at  once  by  the  insight  and 
instinctive  knowledge  of  the  statesman,  who  will  be  guided 
by  the  political,  as  much  as  by  the  purely  financial,  con- 
ditions. 

The  practical  solution  is  not,  however,  so  difficult  as 
would  appear  from  the  preceding  paragraph.  A  good  tax 
system  requires  as  one  of  its  qualities  a  considerable  amount 
of  elasticity,  and  as  far  as  possible  the  first  appeal  should 
be  made  to  taxation.  The  English  Income-Tax  is  a 

Qq 


594  PUBLIC   FINANCE.  [BOOK  V. 

valuable  instrument  for  this  purpose— as  its  employment 
in  the  Crimean  War  shows — and  its  place  in  this  respect 
is  with  difficulty  filled  by  other  taxes.  Still,  the  customs 
and  excise  when  moderately  well  administered  will  allow 
of  increases  for  a  special  emergency.  Tea,  wine,  and  beer 
would  bear  much  heavier  duties  in  England,  and  sugar 
would,  if  again  taxed,  be  a  productive  object.  Some  of  the 
duties  on  '  acts '  could  also  be  advanced  in  case  of  need, 
and  would  soon  yield  a  larger  return  l.  Thus,  even  if  the 
actual  expenses  are  at  first  met  by  creating  a  floating  debt, 
the  new  duties  will  speedily  pay  off  what  has  been  incurred. 
But  when  the  limits  of  ready  expansion  are  reached,  a  loan 
is  the  suitable  mode  of  obtaining  further  supplies.  Where 
there  is  a  pre-existing  debt  in  course  of  redemption,  the 
suspension  of  that  process  will  add  to  the  available  funds 2, 
while  if  there  is  no  debt,  the  smaller  taxation  previously 
levied  will  bear  very  large  additions.  This  last  consider- 
ation suggests  a  disadvantage  in  the  existence  of  a  per- 
manent debt,  in  that  it  brings  future  borrowing  nearer  by 
imposing  so  much  additional  charge  on  the  annual  revenue 
and  thereby  reducing  the  disposable  balance. 

The  probable  duration  of  extraordinary  expenditure  is 
an  important  element  in  determining  the  mode  of  provid- 
ing for  it.  A  sudden  and  large  demand  for  a  single  year 
may  well  be  met  by  borrowing  (unless  the  moveable  taxes 
and  the  suspension  of  debt  redemption  suffice),  as  it  would 
not  be  desirable  to  disturb  the  whole  tax  system  for  such 
a  purpose.  Where  there  is  a  fair  prospect  of  continuous 
outlay  on  the  increased  scale,  a  readjustment  of  taxation  at 

1  Professor  Adams  (Public  Debts,  94)  objects  to  the  use  of  the  income  tax 
for  the  purpose  described  in  the  text,  but  it  seems  on  insufficient  grounds. 
He  hardly  makes  due  allowance  for  the  speedy  yield  of  new  taxes.  '  The 
financier,'  he  thinks, '  may  hope  for  assistance  from  his  new  taxes  within  eighteen 
months  of  their  levy,'  ib.  140.  The  first  duties  would  surely  come  in  much 
sooner. 

3  In  England,  e.  g,  the  suspension  of  the  terminable  annuities  and  the  new 
sinking  fund — as  actually  happened  in  1885 — would  provide  over  £6,000,000 
for  meeting  the  fresh  expenditure. 


CHAP.  V.]  THE  THEORY  OF  PUBLIC   DEBTS.  595 

the  outset  is  the  prudent  course  \  Failure  in  this  cardinal 
point  of  sound  Finance  was  the  cause  of  the  great  accumu- 
lation of  debt  in  England  at  the  opening  of  this  century, 
and  was  also  noticeable  in  the  treatment  of  war  expenditure 
by  the  United  States  both  in  1812  and  1861,  to  which 
instances  the  .treatment  of  the  French  expenditure  on  the 
Crimean  war  may  be  added  2. 

On  the  whole,  then,  the  rules  applicable  to  the  treatment 
of  abnormal  outlay  for  other  than  economic  purposes  may 
be  stated  as  follows  : — (i)  Expenditure  should,  so  far  as  is 
possible,  be  met  out  of  the  annual  receipts,  and  therefore 
increased  outlay  should  be  balanced  by  heavier  taxation. 
(2)  In  the  case  of  non-recurrent  expense  of  large  amount,  a 
loan  is  preferable  to  a  serious  disturbance  of  the  normal 
tax  system,  and  may  fairly  be  employed.  (3)  Where  the 
abnormal  expenditure  extends  over  a  series  of  years,  the 
various  forms  of  taxation  should,  speaking  generally,  be  ad- 
justed to  meet  it.  (4)  This  general  principle,  however, 
fails  where  either  (a)  it  would  be  impossible  to  secure  an 
equitable  division  of  the  heavy  taxation  necessary,  or  (b) 
where  the  limit  of  productiveness  with  regard  to  the  several 
taxes  would  have  to  be  exceeded,  or  finally  (c)  where  for 
political  reasons  it  is  inexpedient  to  press  heavily  on  the 
taxpayers.  Under  any  of  these  conditions  resort  to  loans 
as  a  supplement  to  the  tax  revenue  even  for  a  somewhat 
lengthened  period  is  defensible. 

§  11.  The  fact  that  a  good  deal  of  the  funds  that  are 
obtained  by  public  borrowing  are  derived  from  abroad  is 
of  some  weight  in  judging  the  loan  policy.  Not  that  a 
foreign  loan  is  in  its  purely  financial  bearings  so  different 
from  a  home  one  as  is  sometimes  supposed,  but  that  the 
possibility  of  drawing  on  the  capital  of  other  countries 
weakens  the  argument  in  favour  of  taxation  on  the  ground 

1  For  the  passage  of  '  extraordinary  '  into  '  ordinary'  expenditure  see  Bk.  i. 
ch.  8.  §  i. 

2  For  the  weak  treatment  of  the  English  debt  see  Bk.  v.  ch.  3.  §  4  ;  for  the 
American  instances,  Adams,  112-133  >  f°r  the  French  one,  Bk.  v.  ch.  4.  §  2. 

Q  q  2 


596  PUBLIC   FINANCE.  [BOOK  V. 

that  in  any  event  the  expenditure  must  be  met  from  the 
national  resources.  When  taxation  fails  to  respond  to  new 
demands,  a  foreign  loan  may  supply  the  necessary  sums, 
and  the  competition  of  alien  with  native  lenders  will  enable 
the  State  to  borrow  on  better  terms,  and  with  less  effect  on 
the  rate  of  interest,  and  therefore  to  the  advantage  of  the 
labouring  class.  But  from  a  purely  financial  point  of  view 
the  source  of  a  loan  is  really  immaterial.  In  any  case  it  is 
an  immediate  relief  to  the  taxpayers,  counterbalanced  by 
greater  charge  in  the  future.  Whether  the  wealth  to  be 
consumed  in  the  outlay  that  is  the  primary  cause  of 
borrowing  be  derived  from  the  stores  of  home  or  foreign 
lenders  may  have  some  immediate  influence,  but  when  we 
bear  in  mind  the  close  connexion  of  all  the  countries  of  the 
world,  and  the  great  mass  of  private  borrowing  from 
foreigners,  it  is  evident  that  the  distinction  may  easily  be 
made  too  much  of. 

The  political  and  economic  effects  of  the  much  freer 
movement  of  loan  capital  in  recent  times  are  highly  im- 
portant and  deserving  of  study,  but  they  do  not  belong  to 
Public  Finance.  The  possibility  of  political  complications 
in  consequence  of  a  default  in  the  payment  of  foreign 
creditors  has  been  previously  noticed  l. 

§  12.  Very  important  questions  arise  respecting  the 
absolute  amount  of  public  debts,  the  pressure  that  they 
impose  on  the  borrowing  States  or  other  bodies,  and  the 
best  mode  of  measuring  that  burden.  For  this  purpose 
very  different  methods  may  be  used.  The  most  obvious 
is  that  which  takes  the  nominal  capital  of  the  debt  as  the 
basis  of  measurement.  Thus,  in  1870,  France  and  the 
United  States  had  approximately  the  same  capital  debt 2, 
and  therefore,  it  might  be  said,  an  equal  liability.  The 
defect  of  this  method  is  evident  from  the  fact  that  it  takes 

1  Bk.  v.  ch.  2.  §  3. 

2  France  had  £550,000,000  ;    the  United   States,  including  'State   debts,' 
£532,000,000,  as  their  respective  capital  liabilities.     Leroy  Beaulieu,  ii.  597. 
The  French  debt,  so  far  as  the  central  government  is  concerned,  is  probably 
here  placed  too  high,  but  it  serves  as  an  illustration  of  the  principle. 


CHAP.  V.]  THE   THEORY   OF   PUBLIC   DEBTS.  597 

no  account  of  the  interest  on  the  borrowed  capital,  which 
latter  is  moreover  not  payable  at  the  creditors'  demand. 
'  The  public  debt,'  as  Lord  Grenville  put  it,  '  consists  not 
in  capital  but  in  securities  V  and  the  amount  of  capital  is 
therefore  no  guide  to  the  actual  weight  A  second  method 
might  be  employed  by  which  the  actual,  instead  of  the 
nominal  capital  value,  or  in  other  words  the  market  price 
of  the  stock  would  be  used  as  the  test,  but  this  again  is 
open  to  the  objection  that  the  real  value  is  incessantly 
fluctuating,  and  at  any  actual  time  only  gives  the 
value  of  the  small  amount  sold,  not  of  the  total  mass  of 
stock2.  A  third  mode  takes  the  interest  charge  as  the 
measure,  by  which  a  very  different  result  will  usually  be 
reached  ;  e.g.  in  the  case  of  France  and  the  United  States, 
as  the  former  had  most  of  its  stock  at  3  per  cent.,  while  the 
latter  paid  6  per  cent,  on  much  of  its  obligations,  the  com- 
parison was  altogether  in  favour  of  France. 

All  the  foregoing  methods  deal  with  the  absolute  amount 
of  the  several  public  debts,  and  of  themselves  furnish  but  a 
slight  clue  to  the  sacrifices  undergone  by  the  people  of  the 
country.  For  this  purpose  a  further  combination  is  neces- 
sary, and  the  most  popular  plan  is  to  divide  the  capital  or 
the  interest  charge  by  the  number  of  the  population,  and  so 
get  the  charge  '  per  head.'  How  fallacious  any  test  of  the 
kind  must  be,  has  been  already  shown  in  respect  to  ex- 
penditure3; and  it  is  equally  plain  here,  as  a  comparison  of 
England,  the  United  States,  and  Victoria  against  India, 
Italy,  and  Russia,  suffices  to  prove.  The  mere  population 
of  a  country  is  no  measure,  any  more  than  its  area,  of  its 
wealth  and  financial  capabilities,  which  must  depend  on  so 
many  different  circumstances. 

A  far  better  test  would  be  the  relation  of  debt  to  the 
national  revenue  or,  again,  to  the  collective  wealth  of  the 

1  Essay  on  Sinking  Fund,  29,  quoted  by  McCulloch,  Note  33  to  Wealth  of 
Nations,  632. 

2  Cp.  Jevons'  Theory  119,  120  for  this  distinction. 

3  Bk.  i.  ch.  8.  §  4. 


598  PUBLIC   FINANCE.  [BOOK  V. 

society.  Such  comparisons  are,  however,  by  no  means  easy. 
The  annual  income — and  especially  that  part  of  it  which  is 
disposable— must  be  always  more  or  less  doubtful,  and 
estimates  of  national  wealth,  whatever  method  be  em- 
ployed 1,  have  even  less  chance  of  approaching  accurately 
the  real  position.  Nevertheless  inquiries  of  the  kind  give 
a  good  rough  result,  and  in  relying  on  them  we  may  fairly 
compare  the  annual  charge  of  the  debt  with  the  national 
revenue,  and  in  like  manner  its  capital  value  with  the  sum 
of  national  wealth.  The  annual  charge  of  £19,000,000 
for  the  English  debt  should  be  compared  with  the 
.£1,000,000,000  or  £1,200,000,000  of  national  income,  as  the 
£680,000,000  of  capital — subject  to  whatever  deduction 
may  be  required  for  its  being  under  par  value — should  be 
placed  against  the £10,000,000 ,000  or  £11.000,000,000  which 
may  be  taken  as  the  sum  of  British  wealth 2.  In  this  way 
we  get  about  2  per  cent,  as  the  proportion  of  income,  and 
about  6  per  cent,  as  that  of  capital  assigned  to  the  public 
creditors. 

The  great  discrepancy  indicates  the  omission  of  some 
important  element  in  the  capital  estimate,  which  can  be  no 
other  than  the  capitalized  earning  power  of  the  human 
beings  who  make  up  the  community.  Wages,  industrial 
and  professional  earnings  are  a  part  of  the  revenue,  but  not 
of  the  ordinary  capital  account  of  the  nation  3. 

For  practical  purposes  it  is  often  convenient  to  take  the 
proportion  of  the  total  state  expenditure  required  for  the 
payment  of  the  annual  debt  charge  as  measuring  its  weight. 
Thus  the  smaller  percentage  of  the  English  expenditure  on 

1  The  best  methods  are  :  (i)  that  of  Mr.  Giffen,  which  capitalizes  income,  and 
(2)  that  of  M.  de  Foville,  which  takes  the  property  changing  hands  by  succes- 
sion as  the  base  of  calculation.  Giffen,  Growth  of  Capital ;  De  Foville,  La 
France  Economiqiie  (1887),  437  scl- 

•  If  we  assume  that  the  annual  increase  of  wealth  has  not  changed  since 
1885  we  can  add  ^"900,000,000  to  Mr.  Giffen's  estimate  of  £10,037,000,000 
for  that  year. 

3  Cp.  Prof.  Nicholson's  article  on  '  The  living  capital  of  the  United  King- 
dom '  {Economic  Journal,  i.  95-106),  in  which  the  highly  conjectural  value  of 
£47,000,000,000  is  assigned  to  this  factor,  or  group  of  factors,  of  production. 


CHAP.  V.]  THE  THEORY   OF   PUBLIC   DEBTS.  599 

debt  in  the  total  outlay  as  compared  with  any  earlier  year 
in  the  present  century  shows  so  far  a  reduction  in  the 
burden.  The  relations  of  public  outlay  to  national  revenue 
and  the  amount  of  service  performed  by  the  State  are  both 
elements  to  be  considered  before  this  ready  test  can  be 
used  with  any  accuracy. 

Finally,  in  estimating  the  weight  of  public  debt,  it  is 
necessary  to  take  account  of  the  public  assets  that  are 
available  for  its  liquidation.  The  property  employed  in 
the  various  public  functions  cannot  be  regarded  in  this 
light.  The  buildings  and  other  non-revenue  yielding  pos- 
sessions of  any  government  could  only  be  sold  at  the  cost 
of  abandoning  the  normal  administrative  duties.  Such 
property  is  an  essential  condition  of  state  activity  1.  Very 
different  is  that  part  of  public  property — the  domaine  prive 
of  French  administrative  law — which  supplies  revenue. 
Land,  forests,  mines,  railways,  and  other  industrial  enter- 
prises have  all  a  market  value,  and  would  by  their  sale 
provide  funds  that  could  be  employed  in  paying  off  debt. 
The  real  value  of  all  such  state  property  is  therefore  fairly 
to  be  set  off  as  a  deduction  from  the  debt  before  computing 
its  capital  amount,  as  for  precisely  similar  reasons  its 
annual  yield  must  be  regarded  as  a  mitigation  of  the 
interest  charge.  The  importance  of  this  consideration 
comes  out  very  strongly  in  respect  to  countries  in  the 
situation  of  the  German  States,  the  Australasian  Colonies, 
and  the  Indian  Empire 2.  The  greater  part  of  the  debt 
incurred  by  all  these  countries  has  been  for  the  creation  of 
public  works,  which — be  their  value  more  or  less  than  the 
wealth  expended  in  their  creation — are  undoubtedly  worth 
very  large  sums,  and  if  in  the  hands  of  private  individuals 
or  companies  would  be  regarded  as  constituents  of  national 
wealth.  The  real  debt  burden  of  the  countries  so  situated 
is  much  less  than  the  apparent  one.  It  may  even  be 
altogether  removed. 

1  Cp.  Bk.  ii.  ch.  5.  §  I  for  this  position. 

2  Its  application  in  local  Finance  will  appear  in  Bk.  v.  ch.  8.  §  3. 


600  PUBLIC   FINANCE. 

For  the  purposes  of  this  allowance  it  is  quite  immaterial 
whether  the  property  has  been  created  by  means  of  loans 
or  obtained  in  other  ways.  Revenue  from  the  rent  of  land 
is  as  much  an  aid  towards  the  payment  of  debt  as  receipts 
from  railways  constructed  by  loans.  The  economic  re- 
venues of  the  State  are  a  compensation,  more  or  less 
effective,  for  debt  expenditure.  It  is  in  connexion  with 
the  original  application  of  loans  that  the  distinction  between 
property  obtained  by  their  employment  and  that  otherwise 
derived  comes  up  for  consideration. 

Estimates  of  the  real  weight  of  public  debts  are,  it  is  now 
plain,  by  no  means  easily  formed  ;  the  considerations  to  be 
taken  into  account  are  too  complex  to  be  dealt  with  in  a 
ready  and  off-hand  manner.  The  only  way  of  arriving  at 
a  satisfactory  result  is  by  the  use  of  each  of  the  different 
methods  of  calculation,  and  a  combination  of  their  results 
with  the  due  allowances  previously  pointed  out.  Where 
all  point  in  the  same  direction  a  conclusion  is  easily 
reached  :  where  they  differ  the  selection  of  the  proper  ones 
depends  on  the  object  for  which  the  inquiry  is  made.  If 
annual  pressure  is  to  be  ascertained,  interest  is  more  impor- 
tant than  capital  ;  if  the  cost  of  redemption  is  wanted, 
capital  or  market  value  should  be  the  primary  object  of 
investigation. 


CHAPTER    VI. 

THE  FORMS  OF  PUBLIC  DEBTS. 

§  1.  THE  different  forms  that  public  borrowing  may 
take  affect  the  actual  course  of  public  debt  and  its  develop- 
ment so  much  as  to  need  careful  notice.  Nor  is  the  method 
of  classification  quite  simple.  From  one  point  of  view 
loans  have  been  divided  into  the  three  groups  of  forced  or 
compulsory,  patriotic,  and  voluntary  business  loans.  The 
first  was  a  favourite  method  with  sovereigns  in  earlier  times. 
Up  to  the  reign  of  Charles  I  it  was  used  in  England, 
and  still  later — as  under  Mazarin — in  France.  Spain  and 
Austria  have  supplied  more  recent  instances1.  Such  ex- 
pedients are,  however,  unworthy  of  a  well-managed  State. 
The  compulsory  loan  is  in  fact  rather  a  tax  than  a  credit 
transaction,  and  it  may  be  regarded  as  an  advance  of 
tax  revenue.  Its  injustice  and  inconvenience  ought  to 
effectually  exclude  it  from  the  list  of  fiscal  contrivances. 
The  patriotic  loan  is  for  a  different  reason  equally  inad- 
missible. Experience  shows  that  an  appeal  to  national 
feeling  is  far  less  powerful  than  one  addressed  to  self- 
interest.  The  British  'Loyalty  Loan'  (1796),  though  fully 
subscribed,  was  one  of  the  most  unsatisfactory  in  its 
results.  Other  countries,  e.g.  France  in  1848  and  Germany 
in  1870,  have  altogether  failed  in  their  appeal  to  patriotism 
and  for  the  same  reasons  ;  the  Italian  patriotic  loan  sug- 
gested in  1866  would  also  have  certainly  met  the  same 

1  Leroy  Beaulieu,  ii.  285-6  ;  Roscher,  §  132.  For  a  suggestion  of  a  forced 
loan  by  Pitt  in  1796,  Sinclair,  History  of  Revenue,  i.  344. 


602  PUBLIC   FINANCE.  [BOOK  V. 

fate.  This  result  is  not  entirely  due  to  the  mastery  of  self- 
interest  over  other  considerations  in  the  minds  of  investors. 
For  the  success  of  a  loan  certain  technical  conditions  are 
required.  It  needs  the  aid  of  the  dealers  in  money  to  be 
successfully  'floated,'  and  in  this  respect  the  sentimental 
loan  is  wanting.  Judged  by  its  fruits  the  appeal  to  national 
feeling  is  a  useless  effort  on  the  part  of  the  State. 
/  Voluntary  loans  issued  on  strict  business  principles  are 
therefore  the  only  eligible  mode  of  procuring  funds  in 
time  of  need./  Just  as  the  normal  agencies  of  supply  are 
more  effective  guards  against  scarcity  than  state  super- 
vision or  private  benevolence,  so  is  the  system  of  depending 
on  the  investors'  desire  of  a  reasonable  return  the  right  one 
in  the  case  of  public  loans.  So  long  as  good  security  is 
offered  a  supply  of  wealth  will  be  obtainable  by  any  State 
that  requires  it,  and  the  most  rigid  application  of  business 
methods  and  the  strictest  conformity  to  the  usages  of  the 
money  market  will  generally  prove  to  be  the  cheapest  and 
most  convenient  course. 

§  2.  Another  kind  of  distinction  between  loans  is  found 
in  the  conditions  on  which  they  are  contracted.  /  The  first 
state  debts  were  what  would  now  be  regarded  as  'floating,' 
i.  e.  they  were  advances  repayable  on  demand.  The  need 
of  keeping  the  funds  so  advanced  for  a  lengthened  period 
led  to  the  adoption  of  life  annuities,/which  in  the  tontine 
form  were  a  popular  method  both  in  England  and  France. 
Under  this  plan  the  share  of  each  deceased  annuitant 
lapsed  to  the  survivors,  until  with  the  death  of  the  longest 
liver  the  whole  payment  ceased  l.  The  issue  of  ordinary 
life  annuities  has  also  been  carried  on,  but  only  as  a  sub- 
ordinate part  of  the  debt,  and  in  England  as  a  convenience 
rather  for  the  annuitants  than  for  the  State. 

(The  terminable  annuity  has  certain  advantages  over  the 
ess  definite  plan  of  life  payments  ;  its  exact  charge  can  be 
estimated,  and  the  time  of  extinction  foreseen.  As  we  saw, 
the  annuity  for  a  term  was  used  as  an  additional  advantage 

1  This  system  was  named  from  Tonti,  its  inventor  or  populariser. 


CHAP.  VI.]  THE   FORMS  OF   PUBLIC   DEBT.  603 

to  float  many  English  loans,  and  later  on  as  a  convenient 
way  of  redeeming  debt.  /When  employed  as  the  chief 
mode  of  borrowing  it  has  the  great  disadvantage  of  de- 
preciating year  by  year,  and  is  therefore  unsuitable  for 
permanent  investment,  Avhile  to  the  purely  selfish  person 
it  offers  even  less  attraction  than  a  life  annuity.  It  is  only 
as  an  agent  for  the  redemption  of  debt,  and  when  used  in 
connexion  with  the  available  capital  of  public  departments 
or  banking  companies,  that  the  terminable  annuity  becomes 
effective. 

/  The  modern  system  of  issuing  bonds  redeemable  in 
sections  by  annual  drawings  is  a  refinement  on  the 
preceding  method,  f  To  the  State  it  is  precisely  the 
same,  as  it  is  possible,  by  fixing  the  amount  redeemable 
in  each  year,  to  make  the  annual  payment  even  all  through 
the  period  of  redemption,  while  the  capitalist  is  sure  of  the 
principal  advanced  and  of  interest  until  he  receives  it. 
Still,  it  introduces  a  gambling  element  into  the  value  of 
the  stock,  and  makes  the  suspension  of  redemption  at  any 
time,  no  matter  what  the  pressure,  a  breach  of  faith.  Bor- 
rowing may  even  be  necessary  in  order  to  keep  the  au- 
tomatic process  of  repayment  going  on.  As  a  means  of 
encouraging  the  redemption  of  debt  it  has  undoubted 
merits,  especially  when  that  object  would  otherwise  be 
neglected ;  but  it  may  often  prove  both  costly  and  incon- 
venient when  sudden  pressure  comes  on. 

We  have  previously  seen  the  American  mode  of  borrow- 
ing, with  payment  at  a  fixed  term,  or  rather  at  one  of  two 
prescribed  dates  at  the  State's  option.  /Thus  the  'ten- 
forties  '  mean  loans  repayable  either  within  ten  or  forty 
years,  but  not  at  any  intermediate  date.  /When  a  loan  is 
only  for  temporary  use  a  short  term  may  be  suitable  for  its 
repayment,  while  the  privilege  of  extending  the  time  gives 
a  safeguard  against  the  creditors'  demand.  For  the  United 
States  the  method  may  be  admissible,  though  it  puts 
obstacles  in  the  way  of  speedy  repayment ;  but  for  a 
European  country,  where  redemption  is  very  slowly  carried 


604  PUBLIC   FINANCE.  [BOOK  V. 

on,  it  would  be  most  undesirable,  unless  the  stock  was  below 
par  and  could  therefore  be  purchased  with  advantage.  An 
issue  of  stock  so  calculated  that  it  could  be  converted  into 
a  much  lower  one  at  the  first  date  fixed,  and  then  repaid  at 
the  final  one  might  be  unobjectionable,  though  it  would  be 
very  difficult  to  secure  this  exact  result,  and  the  disposal  in 
the  mean  time  of  the  funds  for  ultimate  repayment  would 
be  hard  to  arrange.  A  sudden  call  for  payment  at  the 
expiration  of  the  term  might  come  at  a  most  trying  time 
and  compel  refunding  on  disadvantageous  terms. 
/  Opposed  to,  and  simpler  than,  the  foregoing  forms  is 
what  is  known  as  £  perpetual '  debt,  i.  e.  where  the  stock  is 
issued  without  any  date  for  repayment,  but  redeemable  at 
any  time  at  the  pleasure  of  the  debtor^  Limits  to  this 
power  of  redemption  may  be  introduced  to  add  to  the 
lenders'  security  or  in  consequence  of  some  special  arrange- 
ment 1,  but  the  general  form  is  as  stated.  On  examination 
it  appears  that  the  real  nature  of  the  obligation  is  to  pay  a 
specified  annuity,  with  the  option  of  wiping  it  out  by  re- 
turning the  original  capital.  Further  conditions  may  be 
added  which  prohibit  repayment  for  a  fixed  period,  but 
this  is  not  usual,  and  when  the  time  elapses  the  ordinary 
form  is  re-established.  It  is  in  this  shape  that  the  bulk  of 
European  debts  exist.  England,  France,  Italy,  the  German 
States  give  instances,  and  a  reference  to  the  advantages 
of  the  arrangement  will  account  for  the  fact. 

In  the  first  place  the  borrowing  State  is  relieved  from 
the  risk  of  demands  for  repayment  of  capital,  and  has  only 
to  provide  for  the  periodical  discharge  of  the  interest. 
Extraordinary  expenditure  is  distributed  into  a  series  of 
smaller  payments,  which  may  be  regarded  as  ordinary,  and 
in  consequence  its  pressure  assumes  a  milder  form.  The 
creditor  is  not,  however,  prevented  from  realizing  the 
capital  value  of  his  loan.  The  modern  stock  exchange 
makes  the  evidence  of  his  debt  a  form  of  intangible  wealth 
which  he  can  always  sell  at  the  market  price.  This  may 

1  Thus  the  present  English  '  consols'  will  not  be  redeemable  until  1923. 


CHAP.  VI.]  THE   FORMS   OF   PUBLIC   DEBTS.  605 

be  more  or  less  than  the  original  sum  advanced,  but  it  is 
the  value  of  the  interest  claim  at  the  time  of  exchange. 
Again,  the  State  is  always  able  to  redeem  so  much  of  the 
debt  as  it  wishes,  by  purchasing  in  the  market  or  repaying 
the  capital,  whichever  is  most  convenient  i.  e.  the  lowest  in 
amount.  The  gradually  improving  credit  of  a  prosperous 
country  will  allow  of  the  reduction  of  the  original  rate  of 
interest,  as  the  offer  of  repayment  will  bring  the  state 
creditors  to  accept  the  terms  offered.  This  use  of  conver- 
sion, as  it  is  called,  has  been  already  illustrated  in  reference 
both  to  England  and  France,  and  its  service  as  a  mode  of 
redeeming  debt  will  appear  later  on1.  It  is  most  easily 
employed  in  regard  to  the  ordinary  perpetual  debt,  which 
is  therefore  so  far  superior  to  the  other  kinds. 

§  3.  But  though  the  simple  system  of  contracting  debt 
redeemable  at  the  debtor's  pleasure  is,  on  the  whole,  the 
best,  it  does  not  follow  that  the  total  mass  of  liabilities 
should  be  reduced  to  that  shape.  Life  annuities,  terminable 
annuities,  debt  redeemable  by  annual  payments,  are  all 
useful  forms  under  certain  conditions.  As  agencies  for 
reducing  debt  or  attracting  certain  special  classes  of  lenders 
they  have  a  real  function  to  discharge,  and  it  is  the  part 
of  the  trained  practical  financier  to  say  how  far  each 
should  be  employed.  Thus  in  England,  the  terminable 
annuities  could  hardly  be  allowed  to  exceed  £  100,000,000, 
as  that  amount  is  quite  sufficient  to  operate  on  at  any 
given  time 2.  The  French  '  redeemable '  debt  should  also 
be  kept  much  below  the  perpetual  rentes.  The  necessity 
of  adjusting  financial  arrangements  to  the  actual  conditions 
is  quite  as  imperative  with  regard  to  borrowing  as  to 
taxation.  The  great  advantage  of  the  perpetual  debt  is 
its  close  resemblance  to  the  stocks  and  shares  of  ordinary 
industrial  companies.  The  debt  paid  off  by  periodical 

1  Bk.  v.  ch.  7.  §  5. 

2  The  stock  held  by  government  departments  does  not  exceed  £70,000,000, 
and  it  is  by  its  use  chiefly  that  annuities  are  created,  as  private  persons  do  not 
regard  them  with  favour. 


606  PUBLIC   FINANCE.  [BOOK  V. 

drawings  may  suit  a  speculative  class,  just  as  life  annuities 
are  sought  after  by  those  who  desire  to  use  their  disposable 
wealth  in  their  lifetime.  To  suit  loans  to  the  taste  of  the 
market  is  one  of  the  chief  duties  of  the  borrowing  govern- 
ment. 

§  4.  This  function  commences  at  the  inception  of  a  loan. 
Not  only  have  its  terms  to  be  such  as  will  draw  the 
required  amount  in  the  cheapest  way;  the  mode  of  offering 
it  must  also  be  carefully  attended  to.  At  the  commence- 
ment of  the  modern  system  of  public  borrowing  in  England, 
a  group  of  capitalists  was  invited  to  furnish  the  required 
amount,  as  at  the  creation  of  the  Bank  of  England,  or  a 
list  was  opened  to  which  all  persons  might  contribute.  In 
this  way  the  utmost  competition  of  capitalists  was  invited. 
The  French  method  of  confiding  the  business  to  bankers 
was  probably  less  efficient.  It  had,  however,  the  merit  of 
enlisting  a  powerful  class  in  its  support  and  making  it  their 
aim  to  keep  up  its  price.  Their  profit,  in  fact,  depended  on 
the  premium  that  they  could  obtain  for  the  stock  over  and 
above  the  subscription  price.  Where  capital  is  not.  widely 
diffused,  and  where  the  money-market  interest  is  powerful, 
this  may  be  the  best  way  to  conciliate  opposition  and  to 
gain  assistance.  Where  a  loan  is  not  peremptorily  needed, 
the  issue  of  bonds  at  a  fixed  price — as  close  to  par  as 
possible — which  will  be  gradually  taken  up  is  convenient, 
while  in  cases  of  great  and  pressing  need  an  appeal  to  the 
public  is  decidedly  the  best.  Where  this  latter  course  is 
chosen,  the  issue  may  be  at  a  fixed  price,  or  better  still,  it  may 
be  to  the  highest  offers,  with  a  minimum  rate  below  which 
no  tenders  will  be  accepted.  By  such  an  expedient  com- 
petition brings  the  price  up  to  the  highest  point,  and  those 
who  offer  the  least  favourable  terms  are  not  accepted. 
The  Australasian  Colonies  have  largely  employed  the 
method  of  taking  the  highest  tenders  down  to  the  price 
at  which  the  loan  is  covered,  and  the  same  system  has 
been  applied  to  some  municipal  loans  in  England.  With 
the  greater  division  of  capital  for  investment  the  direct 


CHAP.  VI.]  THE    FORMS   OF   PUBLIC    DEBTS.  607 

appeal  to  the  small  lender  is  the  most  likely  to  secure 
satisfactory  results,  as  it  is  on  him  that  any  syndicate  of 
bankers  must  in  the  last  resort  depend. 

In  many  cases,  however,  a  loan  is  floated  abroad,  and 
then,  especially  if  the  credit  of  the  borrowing  State  does 
not  stand  very  high,  the  intervention  of  a  group  of  large 
capitalists  who  will  advertise  the  loan  cannot  easily  be 
dispensed  with.  But  in  the  case  of  a  large  State  there 
ought  to  be  no  necessity  for  such  aid.  It  borrows  on  a 
sound  security,  and  appeals  primarily  to  native  investors 
whose  subscriptions,  as  in  the  case  of  the  French  loans  in 
1871-2,  may  often  be  derived  from  their  sale  of  foreign 
stocks. 

§  5.  From  the  form  and  mode  of  issuing  loans  we  now 
come  to  a  much  disputed  question  in  this  part  of  Finance, 
viz.  the  respective  merits  of  loans  bearing  high  interest  with 
small  nominal  capital,  and  loans  with  high  nominal  capital 
and  low  interest.  At  first  sight  it  would  appear  that  all 
loans  should  be  contracted  at  par,  or  as  close  to  it  as  the 
conditions  of  the  market  will  allow.  Thus,  if  £10,000,000 
is  the  sum  required,  it  is  obviously  better  to  issue 
£10,000,000  of  5  per  cent,  stock  than  £12,500,000  at  4  per 
cent.  The  interest  charge  is  indeed  the  same  in  both 
cases,  but  when  the  time  for  repayment  comes  the  holders 
are  entitled  in  the  latter  instance  to  £2,500,000  additional, 
unless  they  sell  under  par>  and  the  prospect  of  converting 
the  debt  into  a  stock  bearing  lower  interest  is  pushed 
further  off,  as  a  5  per  cent,  stock  will  be  nearer  par  than  a 
4  per  cent.  one.  The  issue  of  a  nominal  capital  higher 
than  the  amount  actually  received  seems  accordingly  un- 
justifiable, and  a  departure  from  the  plain  and  simple 
course  of  borrowing.'  So  regarded,  most  of  the  English 
loans  during  the  American  and  French  wars  would  be 
unhesitatingly  condemned,  as  they  were  borrowed  in  3  per 
cent,  stock  at  a  price  greatly  under/#r.  This  method,  which 
is  one  of  the  greatest  blots  on  Pitt's  financial  administration, 
has  been  defended  on  the  ground  that  the  interest  charge 


608  PUBLIC   FINANCE.  [BOOK  V. 

was  reduced  by  it,  since  3  per  cent,  stock  commanded  a 
relatively  higher  price  than  4  or  5  per  cent,  stock.  The 
proper  proportion  between  them  would  be  60,  80,  100, 
but  the  actual  one  was  more  favourable  to  the  3  per  cents. 
The  explanation,  of  course,  was  that  the  lower  stock  offered 
a  chance  of  gain  through  subsequent  increase  in  value 
which  would  be  stopped  in  the  case  of  the  higher  ones  by 
conversion *.  A  further  plea  is  that  of  necessity.  It  is 
said  '  that  Pitt  had  no  choice  ...  he  had  to  borrow,  not  in 
accordance  with  his  own  views,  but  with  those  of  the 
lenders  V  Neither  defence  is  at  all  convincing.  Hamilton 
has  clearly  shown  that  the  difference  in  interest  between 
the  3  and  5  per  cents,  was  only  about  9^.  per  cent.,  and 
that  even  this  should  be  reduced  by  the  advance  of  interest 
for  the  first  year  3.  Now,  such  a  gain  is  by  no  means  enough 
to  counterbalance  the  great  creation  of  capital  with  its  certain 
cost  in  the  future.  There  was  a  small  immediate  saving, 
but  on  the  assumption  that  the  extra  charge  had  been 
defrayed  by  loans,  their  amount  would  have  been  less  than 
the  nominal  capital  added  to  the  actual  sum  received. 
The  plea  of  necessity  is  met  by  the  existence  of  loans  to 
the  amount  of  over  £60,000,000  in  5  Per  cent.,  arid  an 
£8,000,000  one  in  4  per  cent,  stock.  With  sufficient  deter- 
mination, it  is  plain  that  far  larger  sums  might  have  been 
obtained  on  the  same  conditions. 

The  real  explanation  of  this  grave  error  is  to  be  found  in 
three  distinct  circumstances,  viz.  first,  the  belief  in  the 
virtues  of  the  sinking  fund  which  led  to  neglect  of  the 
future  course  of  the  debt ;  it  was  expected  that  by  a 
mechanical  process  the  liability  would  be  wiped  out,  no 
matter  what  its  amount.  Next,  there  was  the  hampering 
influence  of  the  usury  laws  which  made  interest  over  5  per 
cent,  illegal,  and  for  consistency  compelled  the  State  to 

1  See  Newmarch's  paper,  •  Loans  raised  by  Mr.  Pitt,'  in  Statistical  Journal, 
xviii.  104  sq.,  for  an  ingenious  defence  of  the  policy. 

2  Lord  Rosebery's  Pitt,  210. 

3  Hamilton,  197-206. 


CHAP.  VI.]  THE   FORMS   OF   PUBLIC    DEBTS.  609 

keep  within  that  limit.  A  6  per  cent,  or  7  per  cent,  loan 
would  have  been  readily  taken  up,  and  at  the  close  of  the 
war  would  have  been  converted  into  a  much  lower  stock, 
as  happened  in  the  United  States  after  1868.  Lastly,  there 
was  the  natural  desire  to  keep  the  debt  uniform,  and  as  the 
great  bulk  of  existing  obligations  bore  3  per  cent,  interest, 
the  new  issues  were  modelled  on  their  pattern  and  became 
an  indistinguishable  part  of  the  general  mass  of  consols. 

The  two  former  reasons  were  wholly  bad ;  neither 
the  sinking  fund  nor  the  usury  laws  contributed  in  this 
respect  to  the  public  benefit.  The  uniformity  of  stock 
is  no  doubt  desirable.  A  large  stock  sells  better  than  a 
small  one,  and  there  is  less  confusion  and  complication 
where  a  single  rate  of  interest  prevails.  But  the  advantage 
may  be  too  dearly  purchased,  as  it  certainly  is  by  increasing 
the  amount  to  be  paid  in  the  course  of  redemption.  At 
the  lowest  point  of  credit  that  the  English  Funds  touched 
in  1797,  when  the  3  per  cents,  were  only  47,  it  might  have 
taken  9  per  cent,  or  10  per  cent,  (or  perhaps,  7  per  cent, 
irredeemable  for  thirty  years)  to  get  a  loan  at/w,  but  then, 
as  credit  improved,  this  load,  not  so  much  greater  even  at 
first,  would  have  been  reduced  and  less  than  half  the 
capital  sum  would  have  sufficed  for  repayment. 

The  system  of  unduly  increasing  the  nominal  capital 
has  been  extensively  used  in  France  with  still  less  excuse 
than  the  English  government  could  offer,  and  with  the 
evil  result  of  making  the  capital  liability  much  greater. 
Nothing  but  either  very  favourable  offers  for  a  loan  under 
par  at  low  interest,  or  the  absolute  impossibility  of  getting 
advances  any  other  way  can  justify  the  procedure. 

§  6.  There  remain  for  consideration  two  other  forms  of 
state  liability,  that  are  both  in  contrast  with  the  classes  of 
debt  previously  described.  These  are :  (i )  the  floating  debt, 
and  (2)  the  issue  of  inconvertible  paper  money.  The  for- 
mer is  perhaps  the  oldest  kind  of  debt,  and  comes  into 
being  in  the  most  natural  way.  In  the  management  of  so 
large  a  business  as  that  of  the  public  Treasury  it  must 

R  r 


6lO  PUBLIC   FINANCE.  [BOOK  V. 

often  come  to  pass  that  the  payments  for  services  or  com- 
modities will  not  be  made  at  once,  and  that  at  some  periods 
of  the  financial  year  the  outgoings  will  exceed  the  revenue 
received.  As  a  necessary  consequence,  either  the  actual 
persons  who  supplied  requirements  are  for  a  time  unpaid 
or  others  advance  the  funds.  Whichever  it  be,  there  is 
a  temporary  or  floating  debt.  As  the  modern  State  is 
engaged  in  various  business  transactions  and  is  a  lender  of 
money  to  local  bodies 1,  it  will  always  have  a  number  of 
outstanding  accounts  against  it,  with  corresponding  assets 
on  the  other  side.  Should  there  be  a  series  of  budget 
deficits,  the  floating  debt  will,  unless  it  is  funded,  speedily 
accumulate  to  a  formidable  amount,  as  has  been  the 
case  in  several  countries.  A  failure  in  national  credit 
generally  drives  a  government  to  increase  its  floating 
obligations,  which  attract  less  notice  than  the  regular  issue 
of  a  loan  ;  and  in  all  countries  war  or  other  special  pressure 
may  cause  a  temporary  expansion  of  this  kind  of  debt. 

As  a  general  principle  of  Finance  it  is  unquestionable 
that  the  floating  debt  should  be  kept  within  the  narrowest 
limits  possible.  The  ordinary  working  expenses  of  the 
administration  can  be  covered  within  the  year,  and  usually, 
with  the  steady  influx  of  the  duties  on  commodities,  in  a 
far  shorter  period.  The  special  liabilities  in  connexion 
with  savings-banks  or  advances  to  local  bodies  allow  of 
being  dealt  with  as  distinct  accounts,  and  the  latter  can  be 
managed  by  a  funded  debt.  A  growth  of  floating  charges 
is  at  best  a  mark  of  weakness  in  the  treatment  of  the  state 
liabilities.  Though  it  may  not  always  be  convenient  to 
fund  a  mass  of  temporary  debt,  and  a  little  delay  may  be 
admitted,  this  case  is  too  exceptional  to  qualify  the  general 
rule. 

The  great  evil  of  a  floating  debt  is  its  uncertainty.  To 
be  open  to  the  risk  of  a  sudHen  demand  for  payment  is  to 
be  in  the  position  of  a  banker  without  the  securities  with 
which  he  provides  himself;  and  it  is  precisely  in  times  of 

1  Cp.  Bk.  ii.  ch.  4.  §  4,  and  Bk.  v.  ch.  8.  §  5. 


CHAP.  VI.]  THE   FORMS   OF   PUBLIC   DEBTS.  6ll 

commercial  difficulties  that  the  call  is  most  likely  to  be 
made. 

Among  examples  of  unduly  swollen  floating  debts  the 
cases  of  the  United  States  at  the  close  of  the  Civil  War,  of 
England  after  the  French  War,  when  its  amount  was  over 
^"60,000,000,  and  of  France  at  present,  may  be  taken. 
Both  England  and  the  United  States  remedied  their  posi- 
tion by  funding,  and  the  same  course  is  doubtless  advisable 
in  France.  It  might  indeed  be  suggested  that  the  floating 
obligations  should  never  exceed  a  year's  interest  on  the 
funded  debt,  but  where  the  latter  is  very  small  this  rule 
could  hardly  be  applied,  and  that  of  keeping  the  temporary 
charges  under  one-fourth  of  the  annual  revenue  might  be 
substituted. 

§  7.  Inconvertible  paper  issues  and  their  effect  on  eco- 
nomic and  social  life  have  been  abundantly  considered  in 
works  dealing  with  political  economy  and  with  monetary 
and  currency  questions.  The  present  would  be  no  place 
for  such  topics.  Here  we  have  only  to  examine  the  use  of 
a  forced  paper  currency  as  a  financial  expedient.  A  country 
with  a  stock  of  the  precious  metals  in  circulation  has  a  store 
of  wealth  which  it  can  obtain  for  use  by  the  expedient  of 
substituting  paper  for  metallic  money  and  making  it  legal 
tender.  A  loan  up  to  the  value  of  the  gold  and  silver  in  cir- 
culation is  thus  procured  free  of  interest,  and  to  a  hard- 
pressed  government  this  is  no  inconsiderable  attraction. 
Actual  and  historical  illustrations  readily  occur.  England, 
France,  the  United  States,  Austria,  Russia,  Italy,  not  to 
speak  of  smaller  States,  have  employed  this  agency,  and 
have  realized  therefrom  an  immediate  gain.  The  ulterior 
effects  are  not  so  desirable.  The  tendency  to  over-issue  is 
too  strong  to  be  resisted,  and  therefore  we  can  hardly  find 
a  case  of  inconvertible  paper  permanently  keeping  its 
nominal  value.  This  almost  inevitable  depreciation  in- 
volves a  disturbance  of  the  standard  of  value,  and  a  nominal 
rise  of  prices  that  is  on  the  whole  injurious  to  the  most  im- 
portant interests.  Carried  to  a  great  height  the  issue  of 

R  r  2 


6l2  PUBLIC   FINANCE. 

paper  money  is  ruinous  to  national  credit,  while  it  makes 
the  return  to  specie  payments  more  expensive.  At  the 
utmost  all  that  can  be  gained  by  the  policy  is  the  saving  of 
the  interest  on  a  sum  equal  to  the  metals  in  circulation  and 
reserve  in  the  country,  which  can  never  be  very  large  in 
proportion  to  the  total  revenue 1.  Excessive  issues  on  the 
other  hand  mean  a  heavy  tax,  levied  on  the  creditor  class, 
and  a  disturbance  of  the  tax  receipts  of  the  government, 
which  will  be  in  depreciated  paper2,  and  immense  loss  to 
all  holders  if  the  forced  currency  is  not  redeemed  at  its 
'  face '  value,  or  expense  to  the  State  if  it  is. 

There  seems  to  be  a  great  body  of  evidence  in  support  of 
M.  Leroy  Beaulieu's  view  that  the  outbreak  of  war  will  in 
nearly  every  case  lead  to  a  forced  currency  3,  but  this  does 
not  in  the  slightest  change  our  belief  that  such  a  course  is 
both  unnecessary  and  pernicious.  The  modern  system  of 
international  borrowing  is  quite  capable  of  supplying  what- 
ever loans  may  be  required,  and  these,  as  already  argued, 
need  not  be  much  in  excess  of  what  is  raised  by  taxation. 
An  inconvertible  paper  currency,  if  it  secures  a  somewhat 
paltry  gain,  is,  on  the  whole,  an  expensive,  dangerous  and 
unjust  form  of  forced  loan. 

In  a  work  like  the  present  there  is  no  occasion  for  further 
considering  the  technical  forms  of  loans,  whether  by  in- 
scription, by  coupons,  or  other  instruments.  To  keep  in 
accord  with  the  actual  money-market  system  will  be  the 
aim  of  the  prudent  financier,  who  will  naturally  adopt  all 
suitable  expedients  to  make  the  stock  as  easily  transferable 
and  as  secure  as  possible. 

1  The  metallic  stock  of  the  United  Kingdom  has  been  variously  estimated  at 
from  £70,000,000   to   £110,000,000,  the  interest  on  which  would  not  exceed 
£4,000,000.     In  other  countries  the  amount  would  be  greater,  but  the  shock  to 
established  habits  would  also  be  more  felt. 

2  Governments  have  to  accept  legal  tender  money  in  payment  of  taxes,  unless 
in  the  case  of  customs  duties,  which  are  often  made  payable  in  gold  under  the 
erroneous  idea  of  drawing  money  into  the  country.     Leroy  Beaulieu,  ii.  692. 

8  ii.  685  ;  cp.  the  statements  of  Mr.  Goschen  and  Sir  J.  Lubbock  to  the  same 
effect.  Hansard,  April  28,  1882. 


CHAPTER   VII. 

THE  REDEMPTION  AND  CONVERSION  OF  DEBT. 

§  1.  A  STUDY  of  the  conditions  and  limitations  under 
which  public  borrowing  is  alone  admissible  naturally  leads 
to  the  conclusion  that  the  maintenance  of  a  permanent 
debt  ought  to  be  avoided.  If  loans  should  be  contracted 
only  under  great  pressure,  and  to  prevent  the  exhaustion 
of  the  agency  of  taxation,  and  if,  while  they  exist,  they  act 
as  a  drag  on  the  financial  power  of  the  State,  it  cannot  be 
disputed  that  their  speedy  redemption  must  be  eminently 
desirable.  The  same  reasons  that  make  taxation  preferable 
to  borrowing  give  support  to  the  policy  of  raising  taxes  in 
order  to  pay  off  existing  debt.  So  far  as  loans  are  derived 
from  capital  their  repayment  by  taxes  levied  out  of  revenue 
is  a  restoration  of  the  wealth  previously  abstracted  from 
the  work  of  production  to  its  earlier  and  more  economic 
use.  In  any  event  the  return  of  their  wealth  to  the  fund- 
holders  will  not  diminish  the  economic  power  of  the  com- 
munity, as  some  productive  employment  will  certainly  be 
found  for  it,  to  escape  the  loss  of  income  that  must  other- 
wise come  on  the  holders.  The  redemption  of  debt  is  thus 
a  mode  of  increasing  the  amount  of  national  capital,  unless 
on  the  hardly  possible  assumption  that  the  whole  amount 
of  taxation  raised  for  the  purpose  is  drawn  from  capital,  or 
in  the  case  of  a  foreign  loan. 

§  2.  The  assertion  of  the  general  position  that  the  re- 


614  PUBLIC   FINANCE.  [BOOK  V. 

demption  of  public  debt  is  desirable  has  necessarily  to 
be  qualified  by  reference  to  the  particular  circumstances 
of  each  case.  As  it  is  sometimes  allowable  to  borrow,  so 
must  it  be  admitted,  that  cases  may  occur  in  which  neither 
borrowing  nor  repaying  is  judicious.  In  the  crisis  of  war 
or  under  extra  pressure  of  any  kind,  the  suspension  of  the 
mechanism  of  repayment  is  obviously  prescribed,  and  it  is 
quite  conceivable  that  such  a  state  of  things  may  long  con- 
tinue. The  utmost  that  English  financiers  could  have 
done  during  the  protracted  war  with  France  was  to  pay 
the  current  expenses  of  the  State,  and  even  this,  as  we 
know,  they  failed  to  accomplish.  The  postponement  of 
debt  redemption  is  in  such  cases  a  necessity,  the  non-recog- 
nition of  which  was  one  of  the  blots  on  the  sinking-fund 
theory. 

On  precisely  similar  grounds  should  the  amount  of  debt 
to  be  paid  off  in  any  given  year  be  determined.  Sudden 
demands  may  make  it  prudent  to  reduce  the  sums  devoted 
to  this  purpose  as  a  preferable  course  to  the  hasty  increase 
of  taxation.  A  review  of  the  last  thirty  years  of  English 
financial  history  supplies  a  series  of  illustrations.  Exactly 
the  same  redemption  of  debt  could  not  be  right  in  such 
years  as  1868  and  1885,  when  large  extra  expenditure  was 
incurred,  as  in  years  like  1873  and  1889,  when  considerable 
surpluses  were  realized.  Rapid  changes  in  the  public  bur- 
dens are  if  possible  to  be  avoided  ;  indeed  one  of  the  great 
services  of  developed  public  credit  is  the  assistance  that  it 
gives  in  escaping  this  evil.  But  here  again  there  is  a  fur- 
ther influencing  condition.  A  plan  of  redemption  or  reduc- 
tion will  generally  be  organized  as  a  permanent  system, 
and  is  intended  to  operate  through  a  long  series  of  years. 
Suspension  of  an  arrangement  of  the  kind  for  any  slight 
cause  has  a  disturbing  effect  that  is  as  objectionable  as  a 
small  increase  of  taxation.  To  stop  the  normal  action  of 
the  English  terminable  annuities  for  a  few  millions'  increase 
in  expenditure  would  be  a  departure  from  a  settled  policy, 
and  a  bad  precedent  for  the  future.  The  increase  in  outlay 


CHAP.  VII.]    THE  REDEMPTION  AND  CONVERSION  OF  DEBT.   615 

must  be  large  in  proportion  to  the  total  amount  to  justify 
such  action1. 

Debt  redemption  must  also  be  affected  by  the  position  of 
taxation.  Where  inconvenient  and  oppressive  duties  are 
levied  it  may  be  wiser,  even  with  a  view  to  ultimate  repay- 
ment of  loans,  to  relieve  industry  and  trade  from  their 
burdens  and  trust  to  the  increased  productiveness  of  the 
reformed  system  for  compensation.  A  thorough  reform  in 
fiscal  policy  may  prove  the  best  sinking  fund,  or  at  least  its 
best  feeder.  Between  the  remission  of  very  bad  taxes  and 
their  retention  for  the  redemption  of  debt,  there  is  often 
ground  for  deliberation.  Still,  on  the  whole,  the  reasons  in 
favour  of  substantial  redemption  preponderate.  There  is 
no  hard  and  fast  line  between  good  and  bad  taxes.  Every 
tax  is  so  far  an  evil,  and  any  one  may,  if  raised  sufficiently 
high,  become  oppressive  and  unproductive.  Now  if  we 
hesitate  to  redeem  debt  on  account  of  the  badness  of  the 
necessary  taxes,  we  must  remember  that  we  are  thereby 
retaining  worse  taxes  in  the  future  than  would  otherwise  be 
required.  For  let  us  suppose  the  several  forms  of  contri- 
bution to  be  arranged  in  the  order  of  their  eligibility  as 
follows — A,  B,  C,  D,  E,  F.  Then  the  surrender  of  F — the 
worst  tax — in  preference  to  paying  off  debt  means  the  pro- 
longation of  the  existence  of  E,  which  ex  hypothesi  is  worse 
than  D,  since  with  the  disappearance  of  the  debt  the  taxes 
appropriated  to  its  service  would  also  disappear.  The 
£6,000,000  of  taxation — to  take  an  actual  case— at  present 
applied  to  reduce  the  English  debt,  no  doubt  represents  the 
worst  part  of  the  English  revenue,  but  were  the  operation 
completed  it  would  allow  of  the  remission  of  £25,000,000 
of  the  heaviest  part  of  taxation.  The  true  adjustment  is 
therefore  more  complicated,  and  requires  for  its  scientific 
solution  more  refined  calculations  than  are  ordinarily 
recognized  2. 

1  Perhaps  10  per  cent,  of  the  total  amount  would  represent  the  limit  within 
which  increased  expenditure  should  not  alter  the  established  system. 

2  Cp.  Mill,  Principles,  Bk.  v.  ch.  7.  §  2,  for  a  statement  of  the  cruder  view. 


6l6  PUBLIC   FINANCE.  [BOOK  V. 

§  3.  In  the  preceding  section  it  has  been  taken  for 
granted  that  all  payment  of  debt  is  made  out  of  surplus 
revenue.  That,  in  Hamilton's  words, '  the  excess  of  revenue 
above  expenditure  is  the  only  real  sinking  fund  by  which 
public  debts  can  be  discharged  V  is  a  position  too  evident 
to  need  much  formal  vindication.  Any  valuable  property 
possessed  by  the  State  can  be  realized  to  pay  off  liabili- 
ties, but  only  at  the  sacrifice  of  the  revenue  obtained  from 
it.  Both  of  public  and  private  credit  it  is  indisputably  true 
that  repayment  can  be  made  in  no  way  except  by  excess 
of  receipts  over  expenditure.  The  only  possible  mode  by 
which  either  the  individual  or  the  State  can  get  rid  of 
liabilities  is  by  making  income  greater  than  outlay.  Hence 
in  all  well-organized  financial  systems  the  surplus  of  each 
year  is  applied  to  this  object,  and  in  the  continuous 
action  of  those  excess  receipts  lies  the  hope  of  complete 
redemption. 

So  simple  and  obvious  a  fact  ought  to  have  commanded 
universal  assent,  but  the  phenomena  of  credit  have  always 
had  a  remarkable  tendency  to  create  misapprehensions  re- 
specting their  true  character,  and  nowhere  more  than  in 
respect  to  public  Finance.  The  whole  history  of  the  'sink- 
ing-fund '  doctrine  is  an  illustration  of  this  tendency.  In 
its  earlier  form  the  sinking  fund  was  simply  the  surplus  of 
certain  parts  of  the  public  revenue  set  apart  for  the  dis- 
charge of  debt,  and  derived  all  its  efficacy  from  the  excess 
of  revenue  over  expenditure.  But  very  soon  the  fund, 
from  being  a  part  of  the  financial  mechanism,  was  trans- 
formed into  a  positive  entity,  and  treated  as  if  it  had  an 
independent  existence.  On  its  security  fresh  loans  were 
contracted,  and  the  absurdity  of  borrowing  with  one  hand 
while  repaying  with  the  other  was  frequently  perpetrated. 

The  theory  of  Price  led  to  a  new  development.  This 
writer  dwelt  on  the  great  effect  of  compound  interest.  He 
truly  calculated  that  a  very  small  sum  would  with  interest 
upon  interest  accumulate  in  a  few  centuries  to  an  enormous 

1  Hamilton,  10. 


CHAP.  VII.]   THE  REDEMPTION  AND  CONVERSION  OF  DEBT.  617 

amount.  This  principle,  applied  to  the  treatment  of  debt, 
would,  he  argued,  secure  its  speedy  repayment.  All  that  was 
required  was  a  definite  capital  to  start  with,  which  would 
increase  automatically  by  reinvestment  of  the  interest,  until 
it  would  equal  the  whole  debt.  If  to  every  new  loan  a  sink- 
ing fund  of  moderate  amount  were  attached,  its  redemp- 
tion would  be  secured  by  the  growth  of  the  fund  through 
interest 1. 

This  extraordinary  theory  was  reduced  to  practice  in 
Pitt's  'Sinking  Fund'  of  1786,  by  which  a  special  board 
of  Commissioners  was  created  and  £1,000,000  annually 
assigned  to  them  for  the  purchase  of  stock,  which  was  not 
to  be  cancelled,  but  allowed  to  accumulate,  the  interest 
being  applied  to  fresh  purchases,  until  the  original 
£1,000,000  had  risen  to  £4,000,000.  Further  additions 
were  made  in  1792.  The  surplus  of  that  year,  amounting  to 
£400,000,  and  a  further  annual  sum  of  £200,000  were  voted 
to  the  fund  ;  it  was  also  provided  that  all  future  loans  should 
have  a  sinking  fund  of  one  per  cent,  attached  to  them  by 
which  they  would  be  paid  off  in,  at  farthest,  45  years  2. 

The  pressure  of  war  proved  too  much  for  the  strict  ob- 
servance of  this  condition,  and  various  modifications  were 
introduced,  but  the  fundamental  mistake  of  regarding  the 
sinking  fund  as  a  separate  and  distinct  source  of  wealth 
was  still  obstinately  adhered  to.  From  this  error  followed 
the  simultaneous  borrowing  and  redemption  that  were  sup- 
posed to  keep  up  public  credit,  but  which  really  confused 
the  accounts  and  increased  the  cost  of  management.  Pur- 
chases of  stock  for  the  sinking  fund  and  the  issue  of  new 
loans  at  probably  lower  price  meant  so  much  loss  to  the 
State.  A  calculation  of  the  differences  shows  that  the 
annual  charge  imposed  by  the  use  of  the  sinking  fund 
during  the  period  1794-1816  was  over  £550,000. 

1  Price,  Observations  on  Reversionary  Annuities;  criticised  by  Hamilton, 
129-48. 

2  For  Pitt's  Sinking  Fund,  Hamilton,  97-8  ;   Ricardo,    Works,  517.     For 
criticisms  of  it,  Hamilton,  149-60;  and  for  a  more  favourable  view,  Rosebery, 


6l8  PUBLIC    FINANCE.  [BOOK  V. 

So  mistaken  a  policy  could  not  be  maintained  in  the  face 
of  rational  criticism,  which  was  supplied  by  Hamilton  and 
Ricardo.  The  true  principle  of  regarding  the  surplus  as 
the  sinking  fund  was  recognised  in  1819  by  the  arrange- 
ment that  a  real  surplus  of  £5,000,000  annually  should  be 
provided  for  the  repayment  of  debt ;  but  this  course  was 
not  maintained  owing  to  the  bad  position  of  the  Finances, 
and  finally  after  a  careful  inquiry,  in  which  it  was  estab- 
lished that  the  method  used  had  added  ,£1,600,000  to  the 
charge  between  1785  and  1829,  tne  sinking  fund  in  1829 
was  abolished  as  a  separate  institution,  and  the  stock  held 
for  it  cancelled. 

From  the  foregoing  facts  it  is  evident  that  a  sinking 
fund  could  be  useful  only  in  so  far  as  it  was  based  on  a 
surplus  of  revenue  over  outlay,  and  therefore  the  belief  in 
its  efficacy  rested  on  a  fiction.  Its  sole  advantage  consisted 
in  the  pressure  that  it  brought  to  bear  on  the  finance 
minister  to  supply  the  requisite  funds,  while  *  its  operations 
are  scarcely  perceptible  to  a  public,  justly  if  sometimes 
ignorantly  impatient  of  taxation1.'  The  effect  was  in 
practice  to  keep  the  surplus  at  a  higher  point  than  it  would 
otherwise  have  reached,  and  to  prevent  the  reductions  of 
revenue,  which,  as  subsequent  experience  amply  proves, 
were  certain  to  be  demanded.  But  this  benefit  was  too 
dearly  purchased  by  the  extra  cost,  and  was  always  ex- 
posed to  the  risk  of  being  swallowed  up  by  fresh  loans. 

§  4.  The  modern  methods  of  redemption  are  all  founded 
on  the  necessity  of  providing  surplus  revenue  for  the 
purpose  ;  while  at  the  same  time  they  endeavour  to  secure 
the  stability  of  the  sinking  fund,  by  ear-marking  a  special 
sum  for  the  object  of  payment.  Such  is  the  idea  common 
to  the  new  English  Sinking  Fund,  by  which  a  specified  sum 
is  annually  devoted  to  discharge  of  debt,  to  the  *  terminable 
annuities,'  and  to  the  '  redeemable '  debt  as  it  exists  in 
France.  Under  all  these  systems  there  is  a  determination 
of  part  of  the  revenue  to  the  purpose  of  repayment,  which, 

1  Lord  Rosebery,  Pitt,  83. 


CHAP.  VII.]   THE  REDEMPTION  AND  CONVERSION  OF  DEBT. 

if  steadily  persisted  in,  will  extinguish  the  liabilities,  unless 
the  relief  so  obtained  is  used  for  fresh  loans. 

The  chief  difficulty  in  the  way  of  debt  discharge  arises 
from  the  carelessness  or  positive  dislike  of  the  great  body 
of  the  taxpayers  in  respect  to  the  adoption  of  vigorous 
measures  for  its  attainment.  The  simple  and  straight- 
forward policy  of  appropriating  a  large  surplus,  maintained 
expressly  for  the  object,  to  the  useful  function  of  reducing 
the  public  liabilities  is  not  regarded  by  them  with  approval. 
Unless  surrounded  by  some  rather  complicated  financial 
arrangement,  which  disguises  the  true  nature  of  the  process, 
the  surplus  is  apt  to  be  frittered  away  in  expenditure,  or  to 
disappear  by  reductions  of  taxation.  The  English  debt 
after  1819  suffered  in  this  way,  and  nothing  but  very  ex- 
ceptional circumstances  could  have  brought  about  the  great 
repayments  of  the  United  States  debt  after  1866. 

Nevertheless  it  is  perfectly  evident  that  the  redemption 
of  debt  must  sooner  or  later  be  faced.  If  in  times  of 
peace  and  low  expenditure  no  surplus  is  raised,  and  if 
borrowing  is  freely  resorted  to  whenever  exceptional  de- 
mands occur,  then  the  proposition  previously  quoted  from 
Hamilton  x  will  certainly  be  applicable,  and  the  debt  will 
ultimately  '  amount  to  a  magnitude  which  the  nation  is  un- 
able to  bear.'  Insistence  on  this  fundamental  point  is  the 
duty  of  the  wise  financier  who  regards  the  future  as  well  as 
the  present,  and  is  concerned  for  the  continuous  prosperity 
of  the  nation.  The  extent  to  which  taxation  should  be 
carried  for  this  purpose,  and  the  particular  arrangements 
adopted  must  necessarily  be  varied ;  but  the  general  prin- 
ciple holds  good  everywhere. 

An  additional  advantage  of  debt  redemption  should  also 
be  noted.  All  repayment  tends  to  raise  the  credit  of  the 
State 'and  to  improve  the  basis  for  future  possible  loans. 
A  real  sinking  fund— i.e.  one  based  on  an  actual  surplus — 
keeps  up  the  price  of  stock,  though  a  fictitious  one  does 
not.  Each  portion  of  debt  withdrawn  from  the  market 
1  Bk.  v.  ch.  5.  §  4. 


62O  PUBLIC   FINANCE.  [BOOK  V. 

reduces  the  amount  available  for  investors,  and  this  effect, 
while  it  cannot  alter  the  permanent  conditions  affecting 
interest,  yet  improves  the  character  of  the  particular  stock. 
The  amount  of  English  debt  redeemed  in  the  last  thirty 
years  is  one  of  the  elements  in  its  high  price.  Where  the 
debt  is  below  par,  redemption  by  purchase  at  the  market 
rate  steadily  brings  it  up  to  that  point,  when  a  new  agency 
can  be  brought  into  operation. 

§  5.  This  is  the  process  known  as  'conversion/  by  which 
a  stock  bearing  a  given  rate  of  interest  is  altered  or  '  con- 
verted '  into  one  at  a  lower  rate.  We  have  seen  several 
examples  of  its  use  in  England,  France,  and  the  United 
States  l  from  the  first  conversion  of  1716  down  to  the  recent 
one  in  1888.  The  principle  is  very  simple,  and  is  applicable 
both  to  private  and  to  public  credit.  A  landlord  who  has  a 
mortgage  on  his  estate  on  which  he  pays  5  per  cent,  will 
naturally,  if  he  can  borrow  the  amount  at  4  per  cent.,  give 
the  mortgagee  the  option  of  taking  4  per  cent,  instead  of  5 
per  cent.,  or  of  repayment  of  the  principal.  Loanable  capital, 
like  other  commodities,  will  be  sought  on  the  cheapest 
terms,  and  conversion  is  only  a  single  instance  of  the  general 
tendency.  Indeed,  we  may  go  further  and  say  that  where 
it  is  practicable  there  is  a  duty  imposed  on  the  finance 
minister,  who  is  the  agent  of  the  taxpayers  and  bound  to 
consult  their  interest,  to  carry  out  a  scheme  of  conversion 
on  the  best  terms.  Such  a  view  does  not,  however,  com- 
mend itself  to  the  fund-holders,  and  where  they  form  a 
numerous  class  very  strong  opposition  to  anything  of  the 
kind  may  be  expected  2. 

As  the  method  of  conversion  can  only  be  effectively 
applied  when  stock  is  over  par^  it  requires  as  a  condition 
precedent  a  good  state  of  public  credit.  Punctual  payment 
of  interest,  adequate  provision  for  debt  redemption,  and 

1  Bk.  v.  chs.  3  and  ^passim. 

2  In  France,  for  example,  conversion  has  not  for  this  reason  been  attempted, 
at  certain  favourable  periods,  viz.  (i)  under  the  Orleanist  governments,  and  (2) 
between  1878  and  1883. 


CHAP.  VII.]  THE  REDEMPTION  AND  CONVERSION  OF  DEBT.    62! 

prudent  administration  generally  will  all  assist  in  this  work. 
It  need  hardly  be  added  that  the  higher  the  original  rate 
of  borrowing  the  greater  room  there  is  for  the  employment 
of  this  agency,  a  fact  which  we  found  to  be  one  of  the 
strongest  arguments  against  the  creation  of  a  higher 
nominal  capital  than  that  really  borrowed,  but  bearing 
low  interest1. 

Certain  plain  general  rules  hold  good  with  reference  to 
this  part  of  Finance.  First,  the  capital  of  the  debt  should 
not,  if  possible,  be  increased,  as  it  amounts  to  an  addition 
to  the  future  burden.  English  conversions  have  for  the 
most  part  kept  free  of  this  mistake,  but  in  1883  the  offer  of 
£108  of  2^  cents,  for  .£100  3  per  cents,  was  a  doubtful  step. 
Some  of  the  French  conversions,  notably  that  of  1862,  were 
tainted  by  it.  Next,  it  is  desirable  to  make  the  scheme 
simple  and  unencumbered  with  complicated  stipulations  in 
order  that  it  may  be  readily  understood.  A  simple  reduc- 
tion of  interest,  with  perhaps  a  guarantee  against  further 
conversion  for  a  period,  is  on  the  whole  the  best.  The 
fund-holders  will  not  of  their  own  accord  accept  any  plan 
of  reduction :  the  motive  power  comes  from  the  capital 
available  elsewhere,  and  therefore  the  plainer  the  offer 
the  better  the  chance  of  acceptance  it  has.  Thirdly,  it  is 
well  to  choose  the  time  for  the  operation  careTutly.  The 
commencement  of  the  period  of  returning  prosperity  that 
usually  comes  some  years  after  a  commercial  crisis  is  the 
most  suitable.  Loanable  capital  is  then  abundant,  and 
the  rate  of  interest  is  low,  so  that  the  chances  of  succeeding 
are  at  their  highest.  Fourthly,  there  is  an  advantage  in 
using  the  conversion  to  consolidate  stock  of  different  kinds, 
as  has  been  accomplished  in  several  English  cases2 ;  but  this 
consideration  should  not  be  carried  too  far,  as  it  may  be 
essential  to  separate  stocks  bearing  the  same  interest,  but 
issued  on  different  terms,  and  in  any  case  the  operation 
will  deal  with  that  part  of  the  debt  that  bears  the  highest 
interest. 

1  Bk.  v.  ch.  6.  §  5.    2  Those  of  1716,  1751,  and  1888  are  examples. 


622  PUBLIC   FINANCE.  [BOOK  V. 

The  funds  set  free  by  conversion  are  of  course  available 
either  for  the  remission  of  taxation  or  for  further  redemp- 
tion. It  seems,  however,  that  the  latter  use  is  the  prefer- 
able one.  Gains  from  skilful  management  of  the  debt  are 
in  justice  to  be  credited  to  it,  and  their  application  in  this 
way  is,  unless  in  exceptional  cases,  to  be  recommended. 
The  retention  of  the  fixed  debt  charge  at  £28,000,000 
would  have  brought  the  present  English  provisions  for  pay- 
ment nearer  to  the  position  they  should  occupy. 

§  6.  Among  the  plans  proposed  for  getting  rid  of  the 
debt,  that  of  a  general  contribution  by  the  holders  of  pro- 
perty has  commanded  most  support.  Ricardo  declares 
that  '  a  country  would  act  wisely  by  ransoming  itself,  at  the 
sacrifice  of  any  portion  of  its  property  which  might  be 
necessary  to  redeem  its  debt/  and  Mill  allows  that  this 
course  '  would  be  incomparably  the  best  if  it  were  practic- 
able1.' The  objections  are,  however,  overwhelmingly 
strong.  The  method  would  place  the  whole  burden  on 
property-holders,  as  earnings  could  not  contribute  to  the 
extent  that  would  in  fairness  be  required.  But  all  property 
is  not  equally  disposable,  and  some  of  it  will  at  any 
given  time  be  almost  incapable  of  realization.  As  a  con- 
sequence this  class  of  wealth  would  be  sacrificed,  or  its 
owners  compelled  to  borrow  on  far  more  onerous  terms  than 
the  State  has  to  pay.  In  fact  the  same  arguments  that  prove 
the  necessity  of  borrowing  at  times  of  pressure,  also  prove 
the  impossibility,  or  at  all  events  the  great  inexpediency,  of 
wiping  out  debt  by  a  general  contribution. 

The  use  of  capital  in  investments  at  a  higher  rate  of 
interest  has  also  been  suggested  as  a  mode  of  creating  a 
surplus.  Such  a  method  really  involves  the  action  of  the 
State  as  a  capitalist,  the  danger  of  which  appeared  in 
connexion  with  the  economic  receipts  2,  and  in  any  event  it 
is  rather  a  mode  of  increasing  State  income  than  simply  a 
means  of  debt  redemption.  If  the  policy  be  justifiable,  it 

1  Ricardo,  Works,  149 ;  Mill,  Principles,  Bk.  v.  ch.  7.  §  2. 

2  Bk.  ii.  ch.  4.  §  i. 


CHAP.  VII.]    THE  REDEMPTION  AND  CONVERSION  OF  DEBT.   623 

is  so  quite  apart  from  the  existence  of  public  liabilities, 
and  it  should  be  judged  on  its  own  merits. 

§  7.  Altogether  independent  of  the  agencies  already 
noticed,  it  has  been  often  pointed  out  that  there  are  certain 
normal  forces  in  operation  that  tend  to  diminish  the 
pressure  of  debt,  and  will  in  the  future  make  its  redemption 
easier.  The  progress  of  society,  so  much  relied  on  by 
Macaulay,  adds  to  the  national  wealth,  and  makes  a  public 
debt,  that  once  seemed  formidable,  of  comparatively  little 
importance.  The  progress  of  Great  Britain  in  the  last  cen- 
tury would  have  reduced  the  debt  charge  as  it  stood  in  1791 
to  a  very  small  part  of  the  present  public  revenue.  Other 
countries  show  the  same  phenomenon,  and  therefore  there 
is  some  apparent  force  in  the  argument  that  the  redemption 
of  debt  should  be  postponed  to  a  more  seasonable  oppor- 
tunity. In  a  country  like  the  United  States  the  steady 
increase  of  national  wealth  is  sure  to  make  the  debt  burden 
much  lighter  as  time  passes  on. 

But  though  this  fact  undoubtedly  deserves  recognition, 
it  hardly  supports  the  inference  drawn  from  it.  The  repay- 
ment of  debt  is  not  a  weakening  of  national  power,  nor 
ought  it  to  be  a  severe  pressure  on  the  existing  members 
of  the  society.  Its  amount  should  be  kept  within  the 
bounds  set  by  the  extent  of  suitable  taxation,  which  would 
not  press  heavily  on  any  class  of  taxpayers.  The  reduction 
of  debt  is  moreover  a  steady  relief  to  public  credit,  and 
by  its  progress  affords  the  means  for  reducing  taxation. 
Again,  as  each  period  has  its  own  charges  to  meet,  the 
neglect  of  repayment  will  make  the  future  burden  at  least 
equal  to  the  increased  resources.  Such  a  policy  is  a 
dangerous  discounting  of  the  future,  and  the  tendency  to 
adopt  it  is  one  of  the  worst  symptoms  in  modern  Finance. 
There  is,  it  must  be  added,  no  sure  ground  for  concluding 
that  economic  progress  will  continue  indefinitely.  Many 
possible  causes,  some  of  them  in  action  at  present,  might 
bring  it  to  a  standstill.  Jevons  has  familiarized  us  with  the 
idea  that  England's  prosperity  depends  on  her  coal  supply, 


624  PUBLIC    FINANCE.  [BOOK  V. 

which  must  at  some  time  be  exhausted.  This  relation  of 
industrial  expansion  to  the  possession  of  certain  material 
agents  points  to  the  necessity  of  taking  careful  account  of 
!  the  potential  extent  of  these  conditions  of  progress,  before 
allowing  debt  to  be  accumulated.  We  cannot  foresee  the 
precise  line  of  economic  change,  but  it  is  well  to  err  on  the 
side  of  safety,  and  provide  for  the  liquidation  of  existing 
liabilities  within  a  reasonable  period. 

Another  supposed  alleviation  of  the  pressure  of  state 
debts  has  been  discovered  in  the  progressive  depreciation 
of  money  or  the  standard  of  value.  That  the  Australian 
and  Californian  gold  discoveries  had,  among  other  con- 
sequences, the  effect  of  making  the  real  weight  of  public 
debts  lighter  is  evident  enough.  All  depreciation  favours 
the  debtor  at  the  creditor's  expense,  but  so  does  appre- 
ciation give  the  latter  a  like  advantage.  The  mention  of 
this  possibility  shows  the  weakness  of  the  position  of  those 
who  look  to  monetary  depreciation  as  a  source  of  relief.  For 
the  last  twenty  years  the  weight  of  debt  has  been  increas- 
ing, and  in  that  fact  lies  one  of  the  bimetallic  arguments. 
We  cannot  say  whether  in  the  distant  future  the  standard 
of  value  will  rise  or  fall,  and  no  satisfactory  conclusion  can 
be  based  on  its  probable  movement.  But  even  on  the 
assumption  that  depreciation  will  ultimately  take  place,  it 
does  not  follow  that  the  State  will  gain.  Is  it  not  likely 
that  lenders  will  hesitate  to  make  advances  on  a  depreciating 
security,  unless  they  receive  compensation  in  higher  interest 
for  the  risk  they  run?  There  is  in  addition  the  objection  that 
to  cpunt  on  this  change  is  really  to  speculate  on  a  defect 
in  the  standard  that  should  as  far  as  possible  be  remedied. 
The  establishment  of  the  fact  that  future  depreciation  is 
certain  places  on  the  public  authority  the  duty  of  providing 
a  corrective  for  the  faulty  standard  in  existence.  Neither 
on  grounds  of  fact  or  equity  can  we  regard  the  relief  of 
the  state  debt  through  depreciation  as  well-established  or 
desirable. 

§  8.  The  distinction  drawn  between  home  and  foreign 


CHAP.  VII.]    THE  REDEMPTION  AND  CONVERSION  OF  DEBT.   625 

loans  and  the  error  of  exaggerating  its  importance  have 
been  previously  noticed.  In  connexion  with  repayment 
it  has  been  said  that  a  public  loan  held  by  foreigners  is, 
when  productively  applied,  an  augmentation  of  the  coun- 
try's capital,  and  that  its  redemption  is  not  desirable.  Not 
to  dwell  again  on  the  fact  that  the  boundary  between 
inland  and  foreign  loans  is  not  so  very  easy  to  determine, 
it  may  be  remarked  that  the  service  of  a  loan  consists  in  its 
application,  not  in  the  existence  of  the  obligation.  The 
advances  made  to  the  Australian  colonies  for  railways  were 
of  service  by  allowing  those  agencies  of  transport  to  be 
speedily  built,  for  which  purpose  the  continuance  of  the 
debt  is  not  needed.  The  real  question  at  issue  is  rather 
between  the  use  of  state  funds  for  redemption  or  for  fresh 
production,  or  again  between  raising  loans  to  pay  off  debt 
and  "leaving  that  wealth  in  the  possession  of  the  citizens. 
To  settle  this  question  the  rate  of  interest  and  the  probable 
effect  of  the  other  courses  open  must  be  duly  considered. 
When  gains  are  high  the  continuance  of  a  loan  at  a  low 
rate  of  interest  may  be  expedient,  but  effective  provision 
for  repayment  is  the  best  mode  of  securing  loans  at  a 
low  rate. 


S  s 


CHAPTER   VIII. 

LOCAL  INDEBTEDNESS. 

§  1.  THE  rapid  increase  of  the  debts  of  local  governing 
bodies  has  been  noted  in  an  earlier  chapter  as  likely  to 
give  rise  to  serious  financial  difficulties  in  the  future.  A 
national  debt,  whatever  be  its  evils,  is  open  and  conspicuous; 
it  is  under  the  control  of  the  government  of  the  whole 
people,  and  is  based  on  the  total  wealth  of  the  country.  It, 
moreover,  has  usually  been  incurred  for  objects  of  general 
interest,  the  ultimate  value  of  which  can  be  measured,  and 
its  treatment  can  be  affected  by  public  opinion  guided  by 
judicious  criticism.  In  all  these  respects  local  indebtedness 
is  less  favourably  placed.  Instead  of  the  single  State,  there 
are  many  bodies  of  very  different  character  and  importance, 
and  with  altogether  diverse  requirements.  Each  distinct 
administration  borrows  on  the  security  of  its  special  revenue, 
which  may  be  adversely  affected  by  local  conditions.  The 
expenditure  of  the  innumerable  loans  is  very  hard  to 
follow,  and  intelligent  criticism  is  almost  wholly  wanting. 
Sectional  interests  and  ignorance  of  financial  principles 
have  the  same  influence  on  borrowing  that  they  have  on 
taxation  and  expenditure  :  they  tend  to  lower  the  pro- 
bability of  attaining  either  economy  or  just  distribution. 
Under  such  circumstances  it  is  the  more  important  to 
examine  the  chief  features  of  the  system  of  local  borrow- 
ing that  has  spread  so  widely  in  the  last  fifty  years. 

§  2.  As  regards  the  fact  of  increase  there  is  the  most 
positive  and  convincing  evidence.  In  1875  the  local  debt 


CHAP.  VIII.]  LOCAL   INDEBTEDNESS.  627 

of  England  and  Wales  was  £92,000,000.  Six  years  later 
it  came  to ,£144,000,000.  By  1888  the  total  was  £19 2, 000,000, 
or  an  increase  of  £100,000,000  over  the  amount  in  1875; 
giving  for  the  period  of  thirteen  years  an  annual  increase 
of  nearly  £8,ooo,oco.  This  general  growth  is  made  up  of 
special  increases,  which  in  such  an  insta£<$  as  that  of 
London  are  very  striking.  The  metropolitan  debt  now 
touches  £40,000,000,  showing  a  steady  advance  in  the  last 
twenty  years. 

The  Irish  and  Scotch  local  debts,  though  insignificant  in 
comparison  with  those  of  the  English  towns,  are  also  be- 
coming greater,  and  are  now  over  £40,000,000. 

Other  countries  show  the  same  tendency.  The  debt  of 
the  French  communes  (excluding  Paris)  has  risen  from 
£13,600,000  in  1862  to  nearly  £23,000,000  in  1869,  and  to 
£30,300,000  in  1878.  The  Parisian  debt  is  by  itself  a 
formidable  sum.  In  1870  it  was  £59,000,000,  by  1876  it 
had  nearly  reached  £80,000,000.  At  the  end  of  1890  the 
various  debts  of  the  French  capital  after  allowing  for  re- 
demption were  over  £98,000,000. 

Many  of  the  Italian  communes  are  also  falling  into  greater 
debt.  At  the  close  of  1885  the  total  due  by  them  was 
£35,300,000,  and  both  Florence  and  Naples  have  been 
forced  to  compromise  with  their  creditors. 

But  by  far  the  greatest  development  of  local  (and  par- 
ticularly urban)  debt  is  to  be  found  in  the  United  States. 
As  Professor  Adams  has  pointed  out l,  the  great  creation  of 
municipal  debts  was  after  the  opening  of  the  Civil  War. 
He  estimates  the  total  indebtedness  of  the  smaller  division 
in  1860  at  $100,000,000,  of  which  over  one-half  was  due  by 
towns  having  over  7500  inhabitants.  Ten  years  later  (1870) 
this  liability  came  to  $515,800,000,  and  in  1880  had  further 
increased  to  $822,100,000. 

§  3.  The  causes  of  this  general  movement  are  not  diffi- 
cult to  trace.  Local,  like  national,  borrowing  is  dependent 
on  the  existence  of  favouring  conditions ;  and  these  are  to  be 

1  Public  Debts,  343  sq. 
S  S  2 


628  PUBLIC   FINANCE.  [BOOK  V. 

found,  first  in  the  greater  power  conceded  to  local  bodies,  or 
rather  in  the  extension  of  their  administrative  functions 
during  the  present  century.  Another  cause  is  the  far 
greater  amount  of  disposable  wealth  seeking  investment, 
and  the  natural  desire  of  its  holders  to  get  good  security, 
which  most  public  bodies  undoubtedly  afford.  Thirdly, 
the  needs  of  city  life  call  for  the  creation  of  works  involving 
large  capital  outlay.  Drainage,  water-supply,  lighting  and 
transport  agencies,  have,  at  the  lowest,  a  semi-public  char- 
acter, that  has  led  to  their  being  placed  in  many  instances 
under  the  suitable  regulative  body  which  had  to  employ  its 
credit  in  order  to  procure  the  required  funds.  It  is  in  this  last 
respect  that  local  and  national  debts  present  the  greatest 
contrast,  though  some  of  the  latter  have  been  created  in  the 
same  way  1.  The  defenders  of  the  modern  system  of  local 
borrowing  point  to  the  valuable  estate  formed  by  its  use. 
Waterworks,  gasworks,  tramway  lines  and  market  buildings, 
may  all  be  looked  on  as  sources  of  revenue,  which,  after 
meeting  their  liabilities,  will  in  some  cases  give  a  surplus 
for  other  objects  2.  The  element  of  truth  contained  in  this 
mode  of  regarding  debt  has  been  already  considered,  but  it 
is  here  desirable  to  indicate  the  qualifications  to  which  it 
should  be  subjected.  Granting  the  superiority  of  '  repro- 
ductive'  over  'unproductive'  debt,  it  does  not  follow  that 
the  former  is  in  itself  desirable.  That  public  property,  if 
revenue-yielding,  is  an  asset  to  be  set  off  against  liability 
has  been  already  explained.  Whether  either  item  should 
be  preserved  in  the  financial  system  is  a  distinct  and 
separate  question.  Thus  the  various  municipal  industries 
are  obviously  a  great  aid  in  meeting  the  local  debt  charge, 
which,  however,  would  not  exist  except  for  them.  The  real 
point  at  issue  is  the  expediency,  socially,  economically  and 
financially,  of  the  conduct  of  such  industries  by  public 
authorities.  If  public  is  superior  to  private  management 

1  Prussia,  India,  and  the  Australasian  Colonies   may  again   be   given   as 
instances. 
3  See  the  articles  in  The  Times ,May  i8th,  1891,  on  'Local  Debt  in  England.' 


CHAP.  VIII.]  LOCAL   INDEBTEDNESS.  629 

a  financial  gain  may  be  looked  for,  though  it  by  no  means 
holds  good  that  all  profitable  industries  should  be  taken 
up  by  the  public  powers  l. 

There  are,  however,  some  further  considerations  which  tend 
to  limit  the  use  of  borrowing  for  this  object.  The  loan 
system  involves  the  interposition  of  the  credit  of  a  public 
body  between  the  lender  of  capital  and  the  actual  invest- 
ment. Whether  gas  or  water  works  be  economically  success- 
ful or  not,  the  interest  on  the  debt  incurred  for  them  has  to 
be  met.  There  may  be  a  gain,  but,  then,  there  may  be  a 
loss,  in  which  case  the  burden  falls  on  the  contributors  to  the 
particular  revenue  affected.  It  is  in  this  undertaking  of  risk 
that  the  borrowing  system  appears  to  show  its  weakest  side. 
Speculation  is  a  task  altogether  unfit  for  public  bodies.  In 
another  way  the  local  revenue  may  suffer.  The  absorption 
of  a  class  of  industries  in  the  public  property  reduces  the 
amount  of  private  wealth  that  remains  to  be  taxed,  and  it 
is  quite  possible  that  the  loss  in  this  way  may  exceed  the 
supposed  gain  on  the  working  of  the  industries.  The 
burden  of  proof  rests  on  those  who  favour  the  process  of 
forming  a  municipal  domain,  and  they  are  bound  to  es- 
tablish (i)  the  strong  probability  that  the  community  runs 
no  financial  risk,  and  (2)  the  superiority  of  their  method  to 
all  alternative  ones.  The  control  of  special  industries,  as 
indicated  when  considering  the  industrial  domain2,  is  a  less 
pretentious,  but  in  many  cases  a  more  effective,  method. 

§  4.  But  though  the  policy  of  using  public  credit  in  a 
systematic  way  for  the  establishment  of  profit-giving  in- 
dustries should  not  be  hastily  adopted,  and,  if  attempted, 
should  be  kept  within  comparatively  narrow  limits,  there 
nevertheless  remains  a  legitimate  field  for  local  borrowing. 
The  needs  of  any  modern  community  are  such  as  to  make 
increased  expenditure  unavoidable,  and  that  expenditure  is 
largely  devoted  to  the  supply  of  educational,  sanitary,  and 
social  requirements.  Schoolhouses,  baths,  drainage,  libraries, 

1  Cp.  Bk.  i.  ch.  i.  §  2  for  the  limitation  of  public  activity  in  this  respect. 

2  Either  by  special  taxation  or  sale  of  concessions,  Bk.  ii.  ch.  3.  §  6. 


630  PUBLIC   FINANCE.  [BOOK  V. 

and  museums  have  to  be  provided  by  heavy  immediate 
outlay,  and  as  under  the  circumstances  they  cannot  directly 
yield  a  revenue,  it  falls  within  the  province  of  the  public 
power  to  take  them  in  hand  l.  The  economic  conditions 
impose  the  necessity  of  getting  such  works  done  quickly, 
as  otherwise  the  earlier  expenditure  would  be  for  a  long 
time  useless.  Loans  are  accordingly  the  only  available 
means  ;  for  taxation  must  be  kept  within  bounds,  so  as 
not  to  swallow  up  the  nett  revenue  of  a  single  year.  The 
burden  is  by  this  contrivance  distributed  over  the  time 
during  which  the  works  are  of  service,  or  at  least  over  a 
fairly  long  period. 

A  great  deal  of  the  modern  local  debt  has  been  incurred 
for  such  objects,  some  of  which,  e.g.  waterworks,  pass  im- 
perceptibly into  the  strictly  reproductive  part  of  local 
expenditure.  In  the  case  of  London,  for  example,  almost 
the  whole  of  its  liabilities  has  been  so  created.  Paris  in  like 
manner  borrowed  for  the  '  improvements '  of  the  second 
Empire,  and  to  repair  the  damage  of  the  war  of  1870-1. 

This  process  of  anticipating  revenue  has  greater  justifica- 
tion in  the  case  of  a  local,  than  in  that  of  the  central,  govern- 
ment. The  former  deals  with  a  smaller  revenue  on  which 
any  extraordinary  outlay  has  greater  effect,  and  it  is  re- 
stricted in  its  taxing  powers,  while  the  national  government 
can  more  easily  distribute  its  outlay  from  year  to  year,  and 
has  full  control  over  its  means  of  revenue.  As  a  general 
rule,  therefore,  it  is  true  that  loans  are  a  convenient,  indeed 
an  indispensable,  part  of  the  financial  machinery  of  the 
smaller  bodies. 

§  5.  The  forms  or  classes  of  local  borrowing  may  next  be 
considered,  and  here  also  its  difference  from  that  of  the 
State  is  noteworthy.  The  absence  of  sovereign  power 
brings  the  town  or  district  more  nearly  on  a  level  with  the 
industrial  or  trading  company,  while  its  necessary  sub- 

1  Even  on  the  assumption  that  Adam  Smith's  ideas  as  to  the  limits  of  state 
action  should  be  observed,  '  The  duty  of  erecting  and  maintaining  certain  public 
works  '  is  one  of  those  prescribed  .by  him,  Wealth  of  Nations,  286. 


CHAP.  VIII.]  LOCAL   INDEBTEDNESS.  631 

ordination  to  the  central  government  makes  control  and 
regulation  by  the  latter,  expedient.  Just  as  local  ex- 
penditure and  taxation  need  the  watchful  care,  and  at 
times  the  restraining  hand  of  the  Sovereign  *,  so  does 
local  borrowing.  There  is  besides  a  financial  benefit 
in  the  interposition  of  state  credit  to  assist  the  smaller 
subdivisions.  Local  loans,  therefore,  fall  into  two  classes, 
viz.  (i)  those  raised  directly  by  the  borrowers,  and  (2) 
those  obtained  by  advances  from  the  State.  The  former 
until  recently  gave  evidence  of  the  undeveloped  character 
of  local  credit.  Mortgage  loans  or  floating  obligations  were 
the  usual  kinds.  Now,  however,  the  funding  system  is 
making  rapid  way,  and  nearly  every  important  town  has  its 
consolidated  stock,  modelled  on  the  type  of  the  national 
debt.  Corporation  stocks  form  a  distinct  class  of  securities 
in  the  money  market,  and  stand  at  a  high  rate.  This 
higher  organization  has  the  great  advantages  of  procuring 
loans  on  better  terms,  and  of  bringing  the  amount  of  borrow- 
ing before  the  public.  So  long  as  a  town  or  district  debt 
is  broken  up  into  several  separate  forms  its  real  amount 
is  hard  to  ascertain,  and  it  may  be  increased  without  attract- 
ing notice. 

Local  stock  is  sometimes  redeemable  by  annual  drawings, 
(like  the  French  3  per  cents,)  or  more  often  it  is  automatically 
worked  off  by  a  sinking  fund,  the  established  method  in  the 
second  class  of  loans — those  provided  by  the  instrumentality 
of  the  State.  For  very  small  divisions  the  issue  of  separate 
stock  would  be  impossible,  and  any  ordinary  loan  could 
only  be  obtained  at  a  high  rate  of  interest.  The  central 
government  can,  without  inconvenience,  make  advances 
in  such  cases,  and  arrange  for  repayment  by  instal- 
ments at  suitable  times.  In  Great  Britain  the  Treasury 
acts  as  the  intermediary,  and  makes  the  advances  from 
capital,  which  is  really  a  part  of  the  national  debt-. 

1  For  expenditure  and  taxation,  cp.  Bk.  i.  ch.  7.  §  7,  and  Bk.  iii.  ch.  6.  §  9. 

2  The  separation  of  the  local  debt  carried  out  by  Mr.  Goschea  marks  this  very 
clearly. 


632  PUBLIC   FINANCE.  [BOOK  V. 

Belgium  also  has  a  special  fund  for  this  purpose,  and  in 
Germany  the  fund  for  invalids — one  of  the  assets  of  the 
Imperial  treasury— has  lent  more  than  £10,000,000  to  the 
commtmes.  The  convenience  of  thus  providing  local  bodies 
with  advances  on  reasonable  terms  is  very  great,  and  it,  at 
the  same  time,  enables  the  central  government  to  exercise 
a  complete  supervision  over  the  borrowing  so  conducted. 
^  §  6.  Repayment  of  local  debt  has  to  be  regulated  in 
accordance  with  its  general  features.  As  it  is  generally 
incurred  for  objects  that  are  useful,  or  at  least  assumed  to 
be  such,  the  time  of  redemption  may  be  adjusted  to  the 
duration  of  the  utility  created.  Some  improvements  are 
much  more  speedily  exhausted  than  others,  and  it  cannot 
be  well  to  have  a  debt  charge  which  represents  no  present 
benefit.  Again,  local  debt  does  not  ordinarily  arise  from 
any  pressing  emergency.  Its  use  is  rather  to  get  the  work 
quickly  completed,  and  therefore  a  sinking  fund  that  will 
remove  the  charge  within  a  definite  number  of  years  is 
often  serviceable,  since  at  the  conclusion  of  the  term  new 
objects  of  outlay  can  be  dealt  with  in  the  same  way.  The 
larger  bodies  may  prefer  the  issue  of  stock,  redeemable  in 
parts  or  by  annual  sections,  or  even  take  the  chance  of 
further  reductions  of  interest  and  the  power  of  conversion 
thence  arising3.  The  danger  of  this  course  lies  in  the 
possible  neglect  of  the  necessary  provisions  for  repayment, 
and  in  the  undue  accumulation  of  debt.  A  sinking  fund 
that  makes  repayment  compulsory  has  decided  advantages. 
A  difficult  question,  however,  arises  in  connexion  with  the 
determination  of  the  proper  period  for  redemption.  If  it  is 
very  short  the  immediate  taxpayers  suffer,  while  their  suc- 
cessors in  after  years  are  disburdened.  When  a  longer 
time  is  fixed  the  pressure  may  fall  chiefly  on  those  who 
hold  leases  extending  over  the  time,  leaving  the  benefit  to 
a  reversioner  who  has  perhaps  contributed  nothing  to  the 
payment  of  the  charge2.  This  failure  in  just  distribution 

1  Many  of  the  larger  British  towns  are  favourably  situated  for  this  purpose. 

2  Cp.  Fawcett,  Political  Economy ',  629-31. 


CHAP.  VIII.]  LOCAL   INDEBTEDNESS.  633 

is,  however,  primarily  a  question  of  taxation.  We  have 
seen  that  local  charges  should  be  distributed  on  different 
grounds  from  those  that  regulate  general  taxation J,  and 
that  the  chief  reasons  for  making  this  distinction  are  the 
predominance  of  the  economic  element  in  local  expenditure, 
and  the  necessity  of  taking  the  several  interests  benefited 
into  account.  The  use  of  loans  enables  a  just  distribution 
to  be  more  closely  attained,  since  future  interests  come 
under  liability  as  they  are  realized.  But  at  the  same  time 
their  service  in  this  respect  must  be  subordinate  to  their 
general  working.  Direct  taxation  of  reversionary  property 
may  also  be  desirable,  though  this  course  is  limited  by  the 
practical  difficulties  that  it  gives  rise  to.  A  still  better  way 
of  reaching  justice  is  to  maintain  a  steady  policy  with 
regard  to  expenditure.  By  so  dividing  outlay  as  to  keep 
it  in  a  nearly  constant  proportion  to  the  rateable  value  of 
the  wealth  liable,  it  is  clear  that  in  the  great  bulk  of  cases 
the  partition  of  charges  between  holders  of  property  at 
different  times  will  not  be  an  unjust  one,  though  some  ex- 
ceptional instances  may  occur.  Very  heavy  and  irregular 
expenditure  by  means  of  loans  will  be  almost  certain  to 
cause  serious  practical  grievances,  which  would,  however, 
also  be  found  if  taxation  were  employed  in  the  same  way. 

§  7.  Up  to  the  present  our  attention  has  been  chiefly 
directed  to  the  urban  and  smaller  rural  divisions,  and  they 
are  no  doubt  the  most  important.  But  the  indebtedness  of 
intermediate  bodies,  such  as  the  English  Counties,  the 
French  Departments,  the  Prussian  and  Italian  Provinces, 
and  on  a  higher  scale  the  German  and  American  States, 
deserves  some  notice.  Special  conditions  have  prevented 
the  counties  in  the  United  Kingdom  from  coming  forward 
as  borrowers.  A  different  reason  has  closed  the  loan 
market  to  the  American  States,  but  there  are  general 
causes  for  the  smaller  development  of  provincial  borrowing. 
The  works  of  utility  for  which  local  debt  has  been  incurred 
are  for  the  most  part  confined  to  small  areas,  or  are  of 

1  Cp.  Bk.  iii.  ch.  6.  §  5. 


634  PUBLIC    FINANCE.  [BOOK  V. 

national  importance.  They  fall  either  into  the  hands  of  the 
State,  or  into  those  of  the  commune.  The  duties  of  the 
province  are  such  as  can  be,  generally  speaking,  met  out 
of  revenue. 

It  would,  however,  be  going  too  far  to  conclude  that 
there  will  be  no  expansion  of  this  kind  of  public  debt  in  the 
future.  In  relation  more  particularly  to  transport,  there  is  an 
opportunity  for  creating  or  purchasing  railway  lines  or 
canals  of  secondary  importance,  as  in  other  instances  there 
may  be  one  for  an  extension  of  public  forests.  The  German 
States  show  an  example  of  the  former,  which  is  also  found 
to  a  smaller  extent  in  the  French  Departments.  Arterial 
drainage  or  reclamation  of  waste  land  might  also  be  carried 
out  in  the  same  way,  and  the  loans  for  such  objects  should 
be  governed  by  the  same  principles  as  those  applicable  to 
municipal  debts.  So  much  depends  on  the  future  course 
of  political  movement  that  no  prediction  is  possible  ;  but 
for  Finance  it  is  sufficient  to  dwell  on  the  necessity  of 
applying  the  same  rigid  tests  to  all  classes  of  borrowing, 
and  to  insist  on  the  danger  of  its  undue  use. 

§  8.  The  great  importance  of  adequate  control  by  the 
central  government  has  been  already  indicated,  but  it  is 
desirable  to  lay  emphasis  on  the  fact.  If  expenditure  and 
taxation  cannot  be  safely  trusted  to  administrators  who 
may  be  led  astray  by  ignorance  and  prejudice,  still  less  can 
the  power  of  mortgaging  the  property  of  those  under  their 
rule.  For  this  reason  a  rigid  supervision  is  exercised  in 
most  countries.  Local  bodies  in  the  United  Kingdom  can 
borrow  only  by  a  special  legislative  act,  or  after  a  semi- 
judicial  inquiry  by  officials  of  the  State.  In  France 
authorization  is  in  like  manner  needed  for  communal  and 
departmental  loans.  The  American  state  constitutions  often 
place  limits  on  both  state  and  municipal  borrowing  powers, 
and  the  latter  are  also  regulated  by  the  state  legislatures. 
The  convenience,  indeed  the  necessity,  of  some  method 
of  the  kind  is  obvious  ;  without  it  a  numerical  majority  of 
the  district,  perhaps  possessing  little  monetary  interest  in  its 


CHAP.  VIII.]  LOCAL    INDEBTEDNESS.  635 

future  situation,  could  burden  all  the  holders  of  property 
and  future  residents  with  a  load  of  debt.  Heavy  taxation 
soon  brings  a  remedy  in  the  impatience  of  the  taxpayers ; 
but  borrowing  is  for  the  time  an  agreeable  process  whose 
evils  are  only  perceived  later  on.  Thus  the  creation,  the 
amount,  and  the  mode  of  repayment  all  stand  in  need  of 
due  regulation  by  the  supreme  authority  of  the  State.  The 
method  employed  will  of  course  vary  with  the  particular 
circumstances,  but  it  seems  best  to  reduce  the  system  to  a 
set  of  general  rules  limiting  the  amount  obtained  to  a  cer- 
tain proportion  of  the  taxable  value,  requiring  definite 
reasons  for  the  issue  of  each  distinct  loan,  and  providing 
for  a  sinking  fund  or  other  effective  means  of  repayment 
within  no  very  distant  time.  These  conditions  are  all 
insisted  on  by  the  English  Local  Government  Board,  and 
they  seem  to  be  necessary  for  the  protection  of  those 
concerned.  When  exceptional  cases  arise,  an  appeal  to  the 
central  legislature  is  the  proper  way  of  dealing  with  them. 

The  character  and  scale  of  the  particular  bodies  con- 
cerned should  be  further  taken  into  account.  Temporary 
loans  by  a  large  city,  repayable  on  demand  or  within  a 
short  period,  must  be  soon  met  out  of  taxation,  and  they 
may  be  allowed  under  the  same  rules  as  those  controlling 
the  taxing  power.  There  is  no  necessity  for  the  same 
constant  check  as  that  essential  in  the  case  of  small  areas. 

This  power  of  regulation  and  its  efficient  exercise  show 
the  real  unity  of  all  public  liabilities.  Whether  contracted 
by  the  State  or  by  local  administrations,  they  result  from 
the  use  of  the  credit  obtained  through  public  property 
and  the  power  of  taxation.  Their  examination,  therefore, 
must  be  conducted  on  the  same  principles,  and  their  effects 
must  be  combined  to  reach  the  total  result. 


BOOK    VL 


FINANCIAL   ADMINISTRATION    AND 
CONTROL. 


CHAPTER   I. 

INTRODUCTORY.    HISTORICAL  DEVELOPMENT. 

§  1.  WE  recognised  at  the  commencement  of  our  in- 
quiry that  problems  of  administration  and  control  form  an 
integral  part  of  the  science  of  Finance.  It  is  not  sufficient 
to  consider  public  revenue  and  expenditure  with  the  rela- 
tions that  exist  between  them.  The  constitutional  guaran- 
tees for  the  proper  application  of  outlay  and  the  due  and 
moderate  levy  of  taxes,  the  machinery  by  which  those  pro- 
cesses are  effectively  carried  out,  and,  finally,  the  agencies 
by  which,  and  the  manner  in  which,  the  public  accounts 
are  prepared  and  verified,  have  important  effects  on  both 
income  and  outlay,  which  need  to  be  studied  if  we  want  to 
fully  understand  the  nature  and  working  of  public  economy. 
To  the  discussions  of  the  preceding  Books  we  have  to  add 
one  on  '  Budgetary  Legislation '  in  the  widest  use  of  the 
term. 

So  long  as  financial  topics  were  regarded  as  a  part  of 
applied  political  economy,  there  was  some  excuse  for  omit- 
ting to  notice  matters  that  seemed  rather  to  belong  to  the 
domain  of  public  law.  But  when  we  treat  them  as  being  a 
distinct  branch  of  political  science,  this  reason  loses  all 
plausibility.  At  the  same  time  it  must  be  said  that  we 
are  not  directly  concerned  with  constitutional  or  admini- 
strative principles  and  details.  Legal  and  political  con- 
ditions are  of  importance  only  in  so  far  as  they  produce 
financial  effects,  and  need  be  considered  only  from  that 


640  PUBLIC   FINANCE.  [BOOK  VI. 

point  of  view.     Their  more  elaborate  and  thorough  investi- 
gation must  be  left  to  the  jurist  or  political  philosopher. 

§  2.  It  is  instructive  to  note  that  this  side  of  public 
economy,  though  often  neglected  by  modern  writers,  was  the 
part  of  Finance  that  first  attracted  the  attention  of  students 
and  practical  administrators.  The  most  important  part  of 
the  financial  system  to  those  engaged  in  its  working  is  the 
machinery  by  which  the  various  state  requirements  are 
duly  met,  while  to  the  contributor  the  authority  that  taxes 
him,  the  way  in  which  it  uses  its  powers,  and  the  checks 
on  its  action  are  the  really  vital  matters1. 

The  modes  of  financial  regulation,  like  the  forms  of  ex- 
penditure and  revenue,  have  been  gradually  developed  in 
the  progress  of  society.  It  is  unnecessary  to  repeat  the 
account  already  given  of  the  primitive  stage  in  which 
little  special  regulation  is  requisite.  The  sentiment  of 
the  tribe,  or  later  on  of  the  ruler,  is  the  all-sufficient  autho- 
rity for  outlay  or  contribution.  Careful  official  organiza- 
tion and  refined  constitutional  rules  would,  under  such 
conditions,  be  as  impossible  as  any  of  the  other  expedients 
of  higher  social  life,  as  e.g.  the  credit  or  railway  system,  or 
modern  constitutional  government.  To  the  earliest  form 
succeeds  the  period  in  which  the  domain  is  the  chief  source 
of  public  revenue,  as  in  the  city  States  of  Greece  and  Italy, 
and  also  in  feudal  Europe  ;  and  here  the  whole  financial 
mechanism  is  not  very  different  from  that  of  any  private 
economy.  State  or  royal  officers  collect  rent  and  adminis- 
ter whatever  public  property  is  under  their  direct  care  in 
the  method  usual  at  the  time.  Receipts  are  thus  at  once 
applied  to  meet  the  public  wants  according  to  the  ruler's 
discretion.  Along  with  this  economic  or  quasi-private 
revenue  may  be  placed  the  beginning  of  indirect  taxation, 
which  arises  out  of  the  fee  system.  The  various  services 
rendered  by  the  ruler  afford  a  ground  for  indefinite  ex- 
actions, and  his  prerogative  rights,  which  can  easily  be 

1  For  the  attitude  in  this  respect  of  the  mediaeval  writers,  the  Germans  of 
the  seventeenth  century,  and  Montesquieu,  cp.  Intr,  pt.  ii.  §§  3,  5. 


CHAP.  I.]  HISTORICAL   DEVELOPMENT.  641 

stretched  beyond  their  due  limits,  are  enforced  by  his 
servants. 

When  public  economy  has  progressed  so  far,  methods  of 
account  and  control  make  their  appearance.  The  Roman 
Treasury  was  under  the  charge  of  the  Quaestors,  but  com- 
plete unity  of  system  did  not  exist,  and  it  seems  to  have 
been  the  Censors  who  acted  as  finance  ministers  under  the 
direction  of  the  Senate.  Even  in  the  time  of  the  Empire 
there  was  a  separation  between  the  distinct  treasuries  of 
the  State  and  the  Princeps,  though  the  course  of  movement 
was  towards  fusion,  and  the  official  organization  for  the 
collection  and  control  of  revenue  was  minutely  subdivided 
and  graded.  The  method  of  farming  out  the  taxes  on  com- 
modities and  inheritances  must  also  be  regarded  as  a 
further  mark  of  that  incompleteness  of  system  which  was 
inherent  in  the  ancient  state  economy. 

Mediaeval  kingdoms  and  such  smaller  bodies  as  the 
free  cities  were  likewise  forced  to  devise  means  for  the 
due  regulation  of  their  income  and  expenditure.  At  first 
rude  and  imperfect,  they  gradually  improved.  The  Eng- 
lish Exchequer,  with  its  curious  and  picturesque  methods, 
was  an  agency  of  this  kind,  to  which  the  King's  debtors 
had  to  account  and  his  creditors  to  apply  for  payment 1. 
The  Carolingian  empire  had  its  check  on  accounts,  as  the 
rules  of  the  Capitularies  show,  a  system  continued  under 
the  Capetiens,  but  essentially  of  the  nature  of  a  private 
economy. 

A  striking  characteristic  of  this  stage  is  the  rare  and  in- 
frequent use  of  direct  taxation.  It  only  appears  as  an 
occasional  and  extraordinary  resource  reserved  for  times 
of  emergency,  and  quite  distinct  in  its  nature  from  either 
the  economic  revenue  or  the  dues  (Auflageri)  on  commo- 
dities. •  The  importance  of  th'is  circumstance  in  the  present 
connexion  arises  from  the  need  of  the  contributors'  assent 
to  legalize  the  employment  of  direct  levies.  However  cut 

1  Besides  the  Dialogus  de  Scaccario;  Madox,  History  of  the  Exchequer,  and 
H.  Hall,  Antiquities  of  the  Exchequer  may  be  referred  to. 

Tt 


642  PUBLIC   FINANCE.  [Boon  VI. 

down  and  reduced  in  later  times,  it  was  the  common  law 
of  the  feudal  State  that  direct  taxation  required  the  con- 
sent of  the  classes  who  had  to  pay  it. 

§  3.  The  growth  of  the  monarchical  power  from  the 
preceding  condition  was  gradual,  and  is  illustrated  by  the 
history,  both  of  the  later  Roman  Empire  and  of  the  several 
European  countries  in  the  i5th  and  i6th  centuries.  The 
collection  of  revenue  came  to  assume  more  the  aspect  of 
a  public  function,  the  ministry  of  Finance  was  recognised 
as  a  government  department,  and  the  methods  of  control 
and  accounting  were  further  improved.  This  special  pro- 
gress is  bound  up  with  the  whole  course  of  political 
development,  and  can  be  fully  explained  only  by  reference 
to  the  actual  historical  conditions.  The  increase  of  royal 
authority,  the  greater  cost  incurred  in  the  performance  of 
public  tasks,  and  the  more  frequent  use  of  money  in  trans- 
actions conjoined  in  giving  higher  importance  to  financial 
administration. 

One  consequence  of  the  increasing  centralization  of 
government  was  the  inclusion  of  such  smaller  public  econo- 
mies as  the  cities  and  minor  districts  in  the  state  organi- 
zation. The  resulting  absorption — total  or  partial — of 
their  revenues  had  the  natural  effect  of  making  the  need 
for  full  accountability  on  the  part  of  those  engaged  in 
collecting  or  expending  public  funds  still  more  pressing. 
The  loss  of  popular  liberties  and  the  absence  of  due  control 
on  accounts  explain  the  oppression  and  waste  that  usually 
mark  the  financial  practice  of  absolute  governments., 
When  the  salutary  check  imposed  by  the  opinion  of  the 
contributors  is  removed,  it  is  vain  to  expect  the  observance 
of  those  maxims  of  prudence  embodied  in  the  canons  of 
taxation  1,  nor  can  we  expect  a  proper  supervision  of  the 
many  items  of  expenditure. 

The  secrecy  in  respect  to  public  revenue  and  expendi- 
ture that  was  formerly  so  noticeable,  and  which  has  been 
dispelled  by  the  extension  of  constitutionalism,  had  ex- 

1  Cp.  Bk.  iii.  Appendix,  p.  374. 


CHAP.  I.]  HISTORICAL   DEVELOPMENT.  643 

tremely  evil  effects.  On  the  one  hand,  it  allowed  pro- 
digality and  injustice  often  to  escape  notice,  while,  as  an 
aggravation,  fair  and  legitimate  taxation  and  expense  were 
through  ignorance  frequently  regarded  as  grievances.  Pub- 
licity and  responsibility  have  been  shown  by  a  lengthened 
experience  to  be  the  necessary  conditions  for  an  efficient 
administration  of  Finance.  Though  every  country  that 
has  any  semblance  of  an  organized  government  must  pos- 
sess some  of  the  constituents  of  a  financial  administration, 
and  though  it  is  possible,  as  the  case  of  the  Roman  Empire 
proves,  to  have  a  highly  developed  system  of  taxation  and 
expenditure  with  an  extensive  official  class  engaged  in  its 
working  without  any  check  on  the  ruler's  will,  yet  the  prob- 
ability of  prudent  management  and  due  adaptation  to  the 
special  conditions  is  extremely  small.  Sound  Finance  is 
so  bound  up  with  good  government  that  one  cannot  be 
had  without  the  other.  Observance  of  the  technical  rules 
of  public  economy  might  indeed  be  carried  out  by  a  body 
of  trained  administrators  under  an  absolute  monarch,  but 
unless  the  checks  provided  by  the  full  publication  of 
authentic  accounts  and  the  indirect  influence  of  public 
opinion  in  some  shape  or  other  are  in  operation,  it  seems 
hopeless  to  expect  it l. 

§  4.  The  rise  of  constitutional  arrangements  in  respect 
to  financial  matters  undoubtedly  originated  in  England, 
and  therefore  it  may  be  said  that  in  their  present  form  the 
guarantees  for  proper  administration  are  the  result  of  her 
example,  extensively  imitated  in  the  present  century  by 
other  countries. 

The  principle  that  grants  to  the  Crown  should  be  freely 
made  by  the  Estates  of  the  Realm  was,  it  would  appear, 
definitely  established  in  the  I4th  century,  as  was  also  the 
right  -  of  inquisition  into  the  application  of  the  funds  so 

1  The  case  of  France  under  the  Ancien  Regime  is  an  illustration  of  the  evils 
that  result  from  concealment  and  the  absence  of  responsibility.  At  present  the 
Russian  and  Indian  Finances  show  by  their  contrast  the  service  that  publica- 
tion of  vouched  accounts  and  the  power  of  opinion  may  be  even  to  a  subject 
country. 

T   t   % 


644  PUBLIC   FINANCE.  [BOOK  VI. 

provided1.  But  the  events  of  the  i5th  and  i6th  cen- 
turies practically  destroyed  this  older  system,  which  had  to 
be  reconquered  from  the  Stuarts.  The  issues  of  the  Civil 
War  were  closely  connected  with  the  right  of  taxation, 
and  even  on  the  Restoration,  the  supplies  to  Charles  II 
were  determined  by  the  Parliament.  Votes  for  particular 
purposes — e.g.  that  for  the  navy — were  limited  to  the 
amount  deemed  requisite  in  each  case,  though  this  pru- 
dential method  was  in  fact  easily  evaded.  But  the  rudi- 
mentary character  of  financial  control  is  very  apparent 
during  this  period. 

The  Revolution  of  1688  made  parliamentary  supervision 
and  control  a  reality.  By  the  expedient  of  an  annual 
Appropriation  Act  limiting  and  defining  the  objects  of  ex- 
penditure and  the  amount  to  be  devoted  to  each,  it  became 
impossible,  without  directly  breaking  the  law,  to  use  the 
public  funds  in  any  way  other  than  those  sanctioned  by 
Parliament.  The  establishment  of  cabinet  government, 
with  the  inevitably  resulting  dependence  of  the  executive 
on  the  legislature,  brought  the  details  of  financial  manage- 
ment before  the  Lower  House,  which  had  already  asserted 
its  superiority  to  the  upper  one  in  respect  to  money  bills  '2. 
The  annual  financial  statement  known  as  '  the  Budget ' 
thus  arose,  and  the  many  intricate  rules  as  to  the  legis- 
lative conduct  of  financial  business  were  developed  as 
occasion  needed. 

The  preparation  of  the  materials,  and  the  final  checks 
on  the  accounts  were,  as  we  shall  see,  added  subsequently, 
and  will  probably  undergo  further  change,  but  it  is  here 
sufficient  to  remark  that  the  growth  of  British  financial 
legislation  and  control  has  been  quite  indigenous  and  in 
full  harmony  with  the  general  movement  that  has  made  the 
law  of  the  constitution  so  peculiarly  flexible  and  capable  of 
being  adjusted  to  new  conditions.  Budgetary  regulations 

1  Hallam,  Middle  Ages,  iii.  84-6.     For  the  development  of  parliamentary 
taxation  see  Gneist,  Hist.  Eng.  Constitution  (2nd  ed.),  388-93. 
a  Hallam,  Const.  History,  iii.  27-32. 


CHAP.  I.]  HISTORICAL    DEVELOPMENT.  645 

are  really  a  mass  of  laws  and  conventions  in  which  the  latter 
are  perhaps  the  more  important1. 

§  5.  Elsewhere,  speaking  generally,  the  example  of 
England  has  been  followed  and  the  rules  that  in  her  case 
have  been  left  elastic  and  supported  only  by  the  sanction 
of  public  opinion  have  hardened  into  the  rigid  provisions  of 
a  written  constitution.  To  find  the  neatest  expression  in 
strict  legal  form  of  the  code  that  governs  the  conduct  of 
Finance  at  home,  we  have  to  refer  to  the  legislation  of 
France,  Italy,  and  Belgium,  though  of  course  there  are 
variations  due  to  special  circumstances. 

Historically,  this  remarkable  result  began  with  the  revolt 
of  the  American  colonies.  The  right  of  taxation  was  the 
actual  cause  of  dispute,  and  the  establishment  of  American 
independence  involved  the  complete  control  of  the  repre- 
sentatives over  the  national  Finances,  a  privilege  expressly 
provided  for  in  the  existing  Constitution 2  and  hedged 
round  by  effective  guarantees. 

In  France  the  Constituent  Assembly  at  once  asserted 
the  principle  that  no  taxes  were  legal  except  those  voted 
by  the  delegates  of  the  nation,  but  it  did  not  extend  the  con- 
trol of  the  popular  will  to  the  equally  important  matter  of 
expenditure.  As  M.  Stourm  has  shown  3,  this  task  was 
reserved  for  the  Restoration  period,  and  indeed  it  is  naturally 
later  in  order.  The  prevention  of  illegal  exactions  is  a  more 
urgent  work  than  that  of  securing  a  perfectly  correct  appli- 
cation of  the  supplies  voted  for  the  public  service,  and  it  is 
besides  much  easier  to  deal  with.  The  rapid  growth  of 
constitutional  government  has  brought  the  questions  of 
budgetary  legislation  into  greater  notice,  and  the  general 

1  Dicey,  Law  of  the  Constitution,  328-9. 

2  '  The  Congress  shall  have  the  power  to  levy  and  collect  taxes/  Art  i.  §  8. 
'  All  bills  for  raising  revenue  shall  originate  in  the  House  of  Representatives,' 
ib.  §  7.     '  No  money  shall  be  drawn  from  the  Treasury  but  in  consequence  of 
appropriations  made  by  law ;    and  a  regular  statement  and  account  of  the 
receipts  and  the  expenditures  of  all  public  money  shall  be  published  from  time 
to  time,'  ib.  §  9. 

3  Le  Budget,  40  sq. 


646  PUBLIC    FINANCE.  [BOOK  VI. 

result  has  been  a  fuller  recognition  of  the  essential  principles 
of  popular  consent  and  administrative  responsibility  as  they 
have  been  developed  in  England.  The  very  bitterness 
of  the  disputes  on  these  points — specially  illustrated  in 
Prussia1 — proves  the  tendency  towards  their  more  complete 
establishment. 

The  formation  of  a  thorough  system  of  audit  and  account 
is  one  of  the  latest  steps  in  the  attainment  of  a  good 
financial  organization.  In  respect  to  it  England  has  not 
held  the  same  leading  position.  The  system  in  use  on 
the  Continent  is  rather  French  in  its  forms  and  methods, 
and  moreover  has  a  judicial  instead  of  an  administrative 
character2.  Institutions  of  the  kind  have  to  be  judged  by 
their  fruits,  a  test  which  after  all  may  be  endured  without 
fear  by  the  present  English  methods,  imperfect  as  they 
may  seem,  when  abstracted  from  the  particular  instance  in 
which  they  are  employed.  A  final  characteristic  of  modern 
Finance  in  this  department  is  the,  at  least  partial,  co- 
ordination of  general  and  local  income  and  outlay.  Social 
and  economic  conditions  have  contributed  to  this  centraliz- 
ing movement  by  which  the  scattered  elements  of  local 
Finance  are  collected  and  compared  with  those  of  the 
State.  The  necessity  for  bringing  the  checks  of  a  wider 
public  opinion  and  the  restraining  power  of  the  central 
government  to  bear  on  local  action  is  a  further  reason. 
Careful  audit  and  strict  observance  of  the  technical  con- 
ditions desirable  in  any  body  of  accounts  are  now  regarded 
as  indispensable  in  the  regulation  of  the  Finances  of  the 
minor  political  bodies,  and  their  natural  result  is  to  be  seen 
in  a  closer  relation  of  central  and  local  Finance. 

§  6.  The  preceding  historical  notice  was  requisite  in 
order  to  understand  the  actual  condition  of  financial  method 
and  regulation  in  the  civilized  nations  of  the  present  day. 
The  varieties  that  still  exist  are  by  no  means  unimportant, 
either  in  themselves  or  as  evidences  of  the  differences  in 

1  Stourm,  op.  cit.,  23-5. 

3  Cp.  Bk.  vi.  ch.  3.  §  7  for  further  explanation. 


CHAP.  I.]  HISTORICAL   DEVELOPMENT.  647 

political  development  that  have  produced  them  ;  but  there 
is  sufficient  uniformity  to  allow  of  a  general  description 
which  will  hold  true  in  most  cases  and  the  departures  will 
also  admit  of  classification  and  explanation.  It  is  to  this 
object  that  the  succeeding  chapters  will  be  devoted,  though 
necessarily  in  the  briefest  manner. 


CHAPTER   II. 

THE  BUDGET.     ITS  PREPARATION — THE  COLLECTION 
OF  REVENUE. 

§  1.  FINANCIAL  processes  are  necessarily  recurrent ; 
from  the  initial  steps  for  the  provision  of  funds  to  the  final 
closing  of  transactions  certain  proceedings  are  required  that 
must  be  repeated  on  every  similar  occasion.  We  may,  by 
taking  an  instance  of  each  and  combining  them,  bring 
together  the  several  stages  of  a  financial  period,  and  thus 
realize  the  operation  of  the  modern  public  economy  on  one 
of  its  most  important  sides.  Such  a  study  will  naturally 
commence  with  a  notice  of  the  preparation  for  what  is 
known  as  the  Budget. 

This  term,  first  applied  in  England  to  the  annual  finan- 
cial statement 1,  has  in  other  countries  and  in  theoretic  dis- 
cussion come  to  mean  the  financial  arrangements  of  a  given 
period,  with  the  usual  implication  that  they  have  been  sub- 
mitted to  the  legislation  for  approval.  There  is  therefore  a 
combination  of  the  idea  of  (i)  a  valuation  of  receipts  and 
expenditure  or  a  public  balance-sheet,  with  (2)  that  of  a 
legislative  act  establishing  and  authorizing  certain  kinds 
and  amounts  of  expenditure  and  taxation  2.  The  conveni- 
ence of  the  term  as  including  the  several  steps  of  financial 
legislation  and  control  is  so  great  that  it  is  in  that  wider 
sense  that  we  shall  use  it. 

1  Derived  from  the  French  bougette,  the  bag  in  which  the  minister  carried 
the  papers  and  accounts  necessary  for  his  statement.     The  term  seems  to  have 
come  into  use  about  1760.     Dowell,  ii.  139. 

2  For  the  scientific  use  of  the  term  '  Budget '  see  Stourm's  excellent  work  Le 
Budget,  1-5. 


CHAP.  II.]  THE   BUDGET.  649 

§  2.  The  first  requisite  in  the  formation  of  a  budget  is  an 
approximately  correct  account  of  the  expenditure  within 
the  period  to  be  considered.  In  order  to  combine  efficient 
legislative  control  with  regularity  in  payment  for  services 
and  commodities,  it  is  necessary  that  this  estimation  shall 
take  place  beforehand.  Accordingly  in  the  modern  State 
we  find  that  the  several  departments  of  administration  have 
to  frame  what  are  known  in  England  as  their  '  Estimates  ' 
some  time  previous  to  the  opening  of  the  budgetary  period. 
The  particular  mechanism  and  division  will  vary  in  each 
country,  but  in  all  the  general  process  must  exist l. 

The  task  of  bringing  together  the  scattered  elements  of 
outlay  devolves  on  the  Ministry  of  Finance,  and  the  head 
of  this  department  has  in  most  countries  an  indefinite 
power  of  control  over  the  expenditure.  It  is  always  open 
to  him  to  remonstrate  against,  or  at  least  to  comment  on, 
what  appears  to  be  extravagant  outlay,  and  in  the  fullest 
development  of  this  power  lies  a  useful  safeguard  for 
economical  administration.  The  control  exercised  by  the 
Treasury  in  England  over  the  spending  departments, 
though  often  unpopular,  is  yet  in  this  respect  of  the  utmost 
value.  The  necessity  for  giving  a  plausible  reason  for 
every  new  item  of  expense  is  a  hindrance  to  new  and 
unnecessary  claims  that  keeps  within  limits  the  natural 
tendency  to  increase,  and  checks  the  waste  so  common 
in  public  economy. 

English  methods  are  probably  more  effective  than  those 
of  other  countries.  In  France,  the  system  of  control  hardly 
exists,  while  in  the  United  States  the  division  of  authority 
and  the  influence  of  the  committees  of  Congress  hinder 
effectual  supervision 2.  Still,  even  in  those  countries  a  finance 
minister  with  sufficient  courage  and  determination  has  been 
able  to  exercise  a  salutary  influence,  as  the  cases  of  Sully, 
Colbert  and  Villele,  as  also  those  of  Hamilton  and  Galla- 
tin  prove.  The  close  connexion  of  the  several  divisions  of 

1  Stourm,  op.  cit.  ch.  3. 

3  Stourm,  74;  Wilson,  Congressional  Government,  171-2. 


650  PUBLIC   FINANCE.  [BOOK  VI. 

the  financial  system,  on  which  we  have  often  laid  stress,  is 
very  clearly  seen  in  this  part  of  the  subject.  The  prudent 
reduction  of  outlay  is  quite  as  effective  as  the  skilful  ad- 
justment of  resources. 

Nevertheless,  it  is  in  dealing  with  the  latter  side  of  the 
national  account  that  the  financier's  function  is  supposed  to 
specially  consist.  It  lies  with  him  to  say  what  under  the 
given  circumstances  will  be  the  receipts  available  to  meet  the 
estimated  expenditure,  and  if  there  be  an  absence  of  equili- 
brium to  suggest  the  best  mode  of  restoring  it.  For  the 
probable  yield  of  existing  taxes  and  the  receipts  from  the 
domain  in  its  various  forms  the  Minister  of  Finance  is 
dependent  on  his  advisers  who  direct  each  branch,  but  it  is 
essentially  his  duty  to  propose  such  alterations  as  may  be 
advisable,  and  the  more  definite  his  responsibility  is  made, 
the  better  is  the  prospect  of  efficient  management. 

The  creation  of  the  budget  is  therefore  a  work  of  ad- 
ministrative art  in  which  the  use  of  proper  methods  will 
very  materially  improve  the  financial  position  and  con- 
tribute to  the  public  advantage. 

§  3.  A  number  of  questions  naturally  arise  in  respect  to 
the  regulation  of  this  initial  stage  of  action.  We  have 
spoken  of  the  budget  as  covering  the  several  financial 
processes  of  a  period,  but  we  may  say  that  in  practice  this 
rather  vague  term  means  a  year.  The  convenience  of 
taking  stock  of  the  public  income  and  expenditure,  and 
the  fact  that  ordinary  outlay  is  usually  repeated  every 
year,  but  not  oftener,  as  well  as  the  recurrence  of  the 
several  physical  and  economic  conditions  in  the  same  time, 
contribute  to  bring  about  this  result.  Even  where  the 
legislative  sanction  is  not  annually  sought *  the  accounts 
are  separately  stated  for  each  year.  A  longer  term  would 
conceal  the  real  variations :  a  shorter  one  would  fail  to 
eliminate  accidental  changes  and  the  effect  of  special 
circumstances. 

But  though  the  yearly  period  is  always  selected,  there 

1  As  in  some  of  the  smaller  German  States. 


CHAP.  II.]  THE   BUDGET.  651 

is  no  agreement  as  to  the  date  of  its  commencement. 
January  ist,  as  in  France,  Belgium  and  Austria;  April  ist, 
in  England,  Germany  and  Denmark;  July  ist,  as  in  Italy, 
Spain,  the  United  States  and  Canada,  have  been  chosen 
as  the  opening.  The  reason  that  has  determined  the  latter 
dates  is  financial  convenience.  If  the  English  finance  year 
coincided  with  the  civil  one  (as  it  did  up  to  1854)  the  budget 
would  have  to  be  presented  either  long  before,  or  some 
time  after,  the  opening  of  the  period  ;  but  the  former 
would  make  accurate  calculation  of  receipts  and  expendi- 
ture almost  impossible,  the  latter  would  compel  expenditure 
without  Parliamentary  sanction  or  a  recourse  to  '  votes  on 
account.'  The  French  budget  has  generally  to  be  pre- 
pared '  fourteen  or  fifteen  months  before  the  period  of  its 
execution1,'  to  the  detriment  both  of  its  accuracy  and 
unity.  What  particular  date  shall  be  taken  in  each  country 
can  only  be  settled  by  reference  to  its  legislative  and  ad- 
ministrative habits,  but  the  aim  of  bringing  the  preparation 
and  execution  as  close  as  possible  to  each  other  should  be 
the  guide,  and  this  accounts  for  the  selection  of  different 
dates  in  different  nations. 

More  important  than  the  particular  period  are  the  form 
in  which  the  budget  is  presented  and  the  matter  to  be  con- 
tained in  it.  Due  arrangement  and  classification  of  the 
several  chapters,  or  in  English  phrase  '  the  votes,'  will 
make  the  nature  and  movement  of  expenditure  much  more 
intelligible,  and  also  strengthen  the  constitutional  check 
that  the  legislature  possesses.  A  grouping  by  the  several 
ministerial  departments — good  enough  so  far  as  it  goes — 
does  not  suffice  ;  the  English  division  into  '  consolidated 
fund '  and  *  supply '  services,  with  the  subdivision  of  the 
latter  into  'Army,'  'Navy,'  and  'Civil  Service'  votes,  is 
not  full  enough,  while  the  further  breaking  up  into  '  votes ' 
which  may  be  for  '  millions '  or  for  *  thousands '  is  too 
detailed  and  is  open  to  sudden  changes  which  vitiate  com- 
parison. Either  is,  however,  superior  to  the  separate 

1  Stourm,  77. 


652  PUBLIC    FINANCE.  [BOOK  Vi. 

'  appropriations '  of  the  American  Congress,  which  hinder 
a  clear  presentation  of  the  annual  expenses  as  a  whole, 
and  therefore  make  effective  criticism  impossible. 

Next  to  the  proper  arrangement  of  the  many  heads  of 
outlay  comes  the  question  whether  the  total  amounts  or 
merely  the  balances  of  the  various  expenses  and  receipts 
shall  be  presented,  or  in  technical  language  whether  the 
budget  shall  be  a  'gross'  or  a  'net'  one.  The  latter  is 
the  earlier  and  in  some  respects  the  more  natural  method. 
In  a  great  spending  department  such  as  the  Army  it  would 
seem  that  any  trifling  gains  should  be  treated  as  deduc- 
tions from  the  sum  of  expense  which  alone  really  concerns 
the  nation.  In  like  manner  the  cost  of  working  the  Post 
Office  might  seem  immaterial  in  a  financial  point  of  view 
so  long  as  the  gain  remains  unaltered,  a  statement  that  is 
equally  true  of  the  Inland  Revenue  and  the  Customs. 
There  is,  too,  the  further  difficulty  that  with  an  extensive 
state  domain  the  presentation  of  the  gross  figures  gives,  as 
already  noticed,  an  exaggerated  idea  of  both  expenditure 
and  income l.  The  Prussian,  or  the  Indian,  budget  pre- 
sents a  very  different  appearance,  according  as  the  gross  or 
net  items  are  taken  into  account.  But  this  notwithstand- 
ing, the  gross  system  is  better,  inasmuch  as  it  brings  all 
the  details  of  Finance  under  direct  review.  In  the  spend- 
ing departments  it  prevents  irregularities  in  disposing  of 
public  property,  and  in  dealing  with  the  funds  so  obtained, 
or  at  the  worst  it  gives  opportunity  for  bringing  them  to 
light.  Again,  in  regard  to  the  earning  departments,  it  is 
well  .to  have  their  cost  of  working  carefully  watched.  The 
expense  incurred  in  collecting  taxation  is  a  form  of  outlay 
that  may  be  much  reduced  by  suitable  arrangements,  and 
the  introduction  of  a  thorough  control  over  it  is  a  decided 
improvement.  Even  in  the  industrial  departments  of  the 
State  a  like  vigilance  will  on  the  whole  be  useful.  If  the 
English  Treasury  sometimes  keeps  too  tight  a  hand  on  the 
Post  Office,  its  supervision  removes  the  occasion  of  many 
1  Cp.  Bk.  ii.  ch.  5.  §  5. 


CHAP.  II.]  THE    BUDGET.  653 

scandals,  though  in  such  cases  the  recognition  of  some- 
thing more  than  the  purely  financial  aspect  of  the  business 
should,  as  in  the  parallel  instances  of  the  Army  and  Navy, 
be  secured  by  the  concession  of  powers  of  remonstance  to 
the  minister  in  charge  of  it l. 

§  4.  Of  somewhat  the  same  character  is  the  dispute  as  to 
the  separation  of  the  budget  into  distinct  parts.  In  an 
undeveloped  financial  system  the  usual  course  was  to 
assign  a  special  receipt  to  meet  each  special  charge.  Thus 
'ship  money'  explained  its  original  distinction,  and  the 
4  hereditary  excise '  was  designed  to  provide  for  the  King's 
expenses.  As  the  public  economy  advanced,  this  separa- 
tion was  seen  to  be  inconveniently  complicated.  Some 
accounts  had  surpluses,  others  deficits,  and  their  combina- 
tion into  a  '  consolidated  fund '  was  the  obvious  remedy  for 
this  want  of  balance.  Compensation  and  elimination  of 
chance  influences  were  better  attained  by  the  fusion. 

Recently  the  system  of  special  budgets  for  particular 
kinds  of  expenditure  has  been  somewhat  widely  employed, 
though  the  expedient  is  evidently  calculated  to  confuse 
the  public  accounts  and  to  prevent  the  true  situation  being 
realized.  The  general  rule  of  meeting  expenditure  out  of 
income  should  only  be  openly  transgressed  by  the  use  of  a 
loan.  A  surplus  on  the  ordinary  budget,  with  a  deficit  on 
one  or  more  extraordinary  ones,  is  a  direct  infraction  of 
the  principle  that  the  finance  accounts  should  be  submitted 
fully,  simply  and  in  unity  2. 

Another  point  of  some  delicacy  is  the  determination  of 

1  It  seems  plain  that  the  head  of  a  great  industrial  department,  such  as  the 
English  Post  Office  has  become,  should  have  the  same  weight  as  the  heads  of 
the  Army  and  Admiralty  admittedly  possess.     The  great  difficulty  of  applying 
the  strict  administrative  control  necessary  in  the  case  of  public  expenditure  to 
industrial  undertakings  is  one  very  weighty  argument  against  extension  of  the 
state  domain.     The  Treasury  could  hardly  keep  a  Railway  Department  within 
bounds. 

2  The  French  method  of  adding  four  smaller  budgets  to  the  ordinary  one  it 
therefore  a  violation  of  principle  and  injurious  in  practice,  Stourm,  187.     It 
may,  however,  be  said  that  the  Budget  sur  Ressources  speciales  is  really  a 
statement  of  one  part  of  local  Finance.     But  it  is  incomplete  as  regards  the 
communes,  and  in  fact  of  no  service  as  a  mode  of  control. 


654  PUBLIC    FINANCE.  [BOOK  VI. 

the  precise  items  to  be  included  in  a  given  budget.  Start- 
ing with  the  intention  of  giving  the  receipts  and  expenses 
of  a  particular  year,  we  may  either  take  the  actual  incom- 
ings and  outgoings  of  the  Exchequer,  or  we  may  endeavour 
to  assign  to  the  year  under  notice  all  the  revenue,  when- 
ever received,  that  properly  belongs  to  it,  and  charge 
against  it  all  expenditure  incurred  in  it,  though  perhaps  not 
paid  till  a  much  later  time.  In  the  former  or  English 
method  there  is  a  simplicity  and  directness  that  commends 
itself  to  anyone  who  knows  the  benefit  of  those  qualities  in 
Finance,  while  the  latter  appears  to  have  the  advantage  of 
giving  a  more  precise  account  of  the  real  result  of  the  trans- 
actions of  the  period  at  the  sacrifice  of  a  good  deal  of 
delay.  This  part  of  the  subject  more  fitly  belongs  to  a 
later  chapter,  but  here  we  must  note  the  greater  difficulty 
of  estimating  under  the  French  system,  though  it  again  has 
not  much  substantial  effect l. 

Lastly,  there  is  the  problem  of  deciding  on  the  proper 
method  of  estimating  the  expenses  and  income  of  the 
approaching  year.  On  the  correctness  of  these  estimates 
rests  in  a  great  degree  the  success  of  the  budget,  and  no 
parliamentary  majorities  or  use  of  official  power  can  alter 
the  hard  facts  of  Finance.  Sincerity  and  care  are  both 
needed  for  success  in  this  operation.  One  very  natural 
course  in  the  infancy  of  Finance  was  to  take  the  figures  of 
the  preceding  or  some  other  year,  generally  the  last  for 
which  the  accounts  are  made  up,  as  the  basis.  Another 
method  nearly  as  mechanical  is  to  take  the  increases  during 
preceding  years  and  count  on  a  like  result  in  the  future. 
In  reality  these  facts  should  only  be  regarded  as  elements 
in  the  calculation.  The  revenue  and  expenditure  of  a 
State  do  not  move  in  a  definite  course  ;  they  are  acted  on 
by  many  distinct  causes,  and  it  is  on  these  that  the  financier 
should  frame  his  estimates.  In  dealing  with  expenditure 

1  The  respective  merits  of  the  French  compte  d"exercice  and  the  English 
(ompte  par  gestion  are  carefully  considered  by  Stourm  (ch.  5),  who  is  perhaps 
too  favourable  to  the  former. 


CHAP.  II.]  THE   BUDGET.  655 

the  statements  of  the  several  departments  concerned  are  the 
starting-point,  but  it  may  happen  that  their  requirements 
will  prove  more  costly  than  they  themselves  admit,  a  con- 
sideration that  should  not  be  overlooked.  Still,  the  results 
of  experience  and  the  great  extent  of  the  modern  public 
economy  make  valuation  easier  than  it  was  ;  special 
emergencies  apart,  expenditure  is  well  within  the  field 
of  rational  prevision  \  The  receipts  present  greater  varia- 
tions within  the  ordinary  limits,  though  they  are  not 
subject  to  the  great  sudden  changes  that  expenditure  may 
show.  Agricultural  and  industrial  prosperity  or  adversity 
will  leave  their  mark  on  the  revenue  returns.  The  elasticity 
of  certain  taxes  has  been  already  noticed,  and  the  public 
income  as  a  whole  is  sometimes  liable  to  fluctuate.  The 
task  of  estimation  is  therefore  a  work  that  cannot  be  re- 
duced to  any  automatic  rule.  The  circumstances  of  each 
country  and  each  particular  year  will  have  to  be  examined 
on  their  merits.  In  this  respect  the  modern  development 
of  statistics  has  been  a  most  efficient  auxiliary.  The 
financier  of  the  present  day  has  at  his  disposal  materials  that 
were  unknown  to  his  mediaeval  or  even  eighteenth-century 
predecessor.  Population,  banking,  shipping,  agricultural, 
and  industrial  statistics,  together  with  the  criticism  to 
which  they  are  subjected,  are  available  as  aids  in  forming  a 
judgment  on  the  probable  course  of  the  facts  material  to  the 
growth  of  revenue,  and  as  these  technical  instruments  im- 
prove we  may  expect  even  greater  accuracy  in  the  future. 

§  5.  The  several  processes  just  described  are  essential 
preliminaries  to  a  due  presentation  of  the  budget  for  the 
assent  of  the  national  representatives.  This  legislative  ap- 
proval, however  important  or  even  vital  in  the  modern 
constitutional  State,  is  nevertheless,  as  we  saw  in  the  last 
chapter,  a  late  addition  to  the  financial  mechanism,  and 
therefore,  before  considering  it,  we  shall  deal  with  the  more 

1  The  estimates  of  expenditure  in  England  for  the  three  years  April  i, 
1889  to  March  31,  1892,  as  compared  with  results,  show  an  error  of  only 
.£137000,  in  a  total  of  .£264,000,000,  or  a  little  over  i/-  per  .£100. 


656  PUBLIC    FINANCE.  [BOOK  VI. 

general  machinery  by  which  the  public  revenue  is  brought 
into  the  Exchequer.  At  first  the  contributions  in  kind 
were  delivered  directly  to  the  leader  of  the  tribe,  who 
also  collected  the  economic  receipts,  such  as  they  were. 
The  State,  as  its  organization  gradually  developed,  dealt . 
with  its  taxes  on  the  private  or  '  contract '  system.  Thus 
both  in  Greece  and  Rome  the  great  mass  of  the  public 
revenue  was  collected  by  farmers,  or  paid  in  directly  by  the 
dependent  cities  as  tribute.  This  method,  so  characteristic 
of  an  ill-organized  economy,  continued  in  regard  to  the 
Roman  indirect  taxes  to  the  last,  and  was  revived  in  the 
absolutist  monarchies  of  the  sixteenth  and  seventeenth 
centuries.  The  other  mode,  viz.  that  of  apportioning  taxa- 
tion to  the  several  cities  or  districts,  is  evidently  due  to  the 
establishment  of  contributions  after  conquest,  and  it  also 
is  an  inheritance  from  an  earlier  stage. 

The  use  of  direct  taxation  and  the  increasing  power  of 
the  State  brought  the  special  tax  officials  into  more  pro- 
minence. At  first  the  supervisors  of  the  state  domain 
collected  whatever  taxes  were  not  let  out  by  contract.  In 
England  this  duty  fell  to  the  sheriff,  who,  however,  often 
obtained  his  office  'by  purchase ;  the  count  discharged 
the  same  function  in  the  Carolingian  Empire.  But  the 
great  source  of  a  special  official  organization  is  found  in  the 
customs  revenue,  which  was  more  peculiarly  in  the  King's 
hands.  The  unfortunate  policy  of  letting  out  the  indirect 
taxes  was  widely  adhered  to,  as  e.g.  in  France,  where  the 
Fermiers  generaux  were  a  power  in  the  State.  The  older 
system  of  separate  and  privileged  districts  and  towns  con- 
tinued to  a  great  extent  up  to  the  end  of  the  eighteenth 
century,  so  that  many  public  levies  were  apportioned 
among  the  contributing  groups,  to  be  afterwards  sub- 
divided between,  the  members  of  each.  The  farming 
system  and  that  of  apportionment  are  the  most  decisive 
marks  of  an  imperfect  fiscal  system.  The  former  puts  the 
payment  of  taxes  on  the  same  footing  as  a  private  debt, 
while  the  latter  interposes  a  distinct  authority  between  the 


CHAP.  II.]  THE   COLLECTION  OF    REVENUE.  657 

citizen  and  the  State.  It  is  not  necessary  here  to  dwell  on 
the  grievances  that  the  farming  out  of  revenue  has  pro- 
duced. The  Roman  *  publican  '  and  the  French  '  fermier ' 
were  both  proverbial  instances  of  rapacity,  and  the  loss  to 
the  revenue  was  only  exceeded  by  the  sufferings  of  the 
poorer  contributors.  Apportioned  taxes  are  plainly  in- 
elastic in  yield,  and  generally  defective  in  distribution. 
Both  are,  however,  justifiable  under  certain  conditions. 
Where  tax-collectors  are  easily  corrupted  and  organization 
is  backward,  farming  may  be  the  only  way  of  making 
duties  productive  and  of  meeting  the  expenses  of  collec- 
tion. In  like  manner  it  is  expedient  to  adopt  the  appor- 
tioned tax  where  the  statistical  data  for  correct  assessment 
are  wanting,  or  where  evasion  is  a  serious  danger  \ 

The  recognition  of  the  relative  use  of  these  more 
primitive  forms  does  not  in  the  least  show  that  the 
collection  of  revenue  by  public  officials,  for  the  benefit 
solely  of  the  public  powers,  is  not  now  the  right  one. 
Fiscal  practice  supports  this  view.  Every  modern  govern- 
ment has  its  customs  department  for  that  branch  of 
revenue,  while  the  internal  receipts  are  obtained  by  one 
or  more  official  agencies.  In  England  the  Inland  Revenue 
Department  has  absorbed  the  several  Boards  that  pre- 
ceded it,  but  the  Post  Office  necessarily  preserves  a  separate 
existence.  Three  different  departments  collect  the  French 
internal  revenue  under  the  heads  of  direct,  indirect,  and 
stamp  duties,  the  public  industries  being  also  separately 
dealt  with.  The  Prussian  finance  department  undertakes 
the  main  work  of  revenue  collection,  but  the  Ministries 
of  Agriculture  and  Public  Works  have  the  management  of 
the  quasi-private  receipts. 

In  all  countries,  however,  the  tax  system  must  at  last 
come  in  contact  with  the  individual  citizen,  and  it  is  very 
prudent  to  make  this  unpleasant  relation  as  little  irksome 
as  possible.  Hence  have  originated  Adam  Smith's  rules  as 


1  Cp.  Wagner,  ii.  747. 
U  U 


658  PUBLIC   FINANCE. 

to  the  '  certainty  '  and  '  convenience '  of  taxation  \  as  also 
the  very  general  preference  of  administrators  for  indirect 
taxation  in  which  the  number  of  persons  dealt  with  is 
reduced  to  a  more  manageable  figure.  Where  direct  taxa- 
tion is  largely  used,  the  local  authorities  or  their  officials 
may  be  utilized  for  the  purpose  of  collection,  but  it  appears 
that  on  the  whole  centralization  is  more  effective,  though 
the  same  person  may  conveniently  be  the  agent  of  both 
administrations.  Simplicity  and  rapid  action  are  not  the 
most  conspicuous  qualities  of  '  self-government,'  but  they 
are  those  most  needed  in  the  collection  of  revenue. 

§  6.  The  actual  process  by  which  the  funds  find  their 
way  from  the  taxpayer's  pocket  to  the  central  treasury  of 
the  State,  must  depend  on  the  economic  condition.  In 
earlier  times  contributions  in  kind  would  be  moved  by  the 
collectors  to  the  place  where  they  were  needed.  Taxes 
paid  in  money  have  to  be  brought  to  the  public  treasure- 
house,  and  stored  up  for  future  use.  The  development  of 
credit  enables  the  whole  proceeding  to  be  carried  out  by  the 
agency  of  banks.  Thus  the  old  English  Treasury  has  been 
superseded  by  the  Bank  of  England,  into  which  the  receipts 
flow  from  the  various  points  of  collection.  The  French 
system  of  'sub-treasuries,'  which  keep  separate  accounts 
and  transmit  their  surpluses  either  in  coin  or  by  the  aid 
of  the  Bank  of  France,  is  more  complicated  and  costly. 
There  can  be  no  doubt  that  centralization,  not  merely  of 
the  staff  but  of  the  receipts,  so  easily  accomplished  by  the 
aid  of  credit,  is  the  best  course.  Backward  countries  must, 
however,  make  use  of  branch  treasuries,  and  provide  for 
the  storing  of  coin  at  convenient  points  in  order  to  reduce 
the  expenses  of  its  transmission  ;  but  whatever  be  the  treat- 
ment of  the  actual  material  of  revenue,  its  combination  in 
the  public  accounts  into  a  single  body  to  be  dealt  with  at 
the  pleasure  of  the  Sovereign  is  one  of  the  processes  need- 
ful for  the  establishment  of  a  proper  budget. 

1  See  as  to  these  rules  Bk.  iii,  Appendix. 


CHAPTER  III. 

THE  VOTE  OF  THE  BUDGET.   CONTROL  AND  AUDIT. 

§  1.  THE  first  stage  in  the  life-history  of  the  budget  is 
finished  when  the  administration  has  laid  its  proposals 
before  the  Legislature.  It  is  highly  desirable  that  the 
scheme  of  Finance  so  presented  should  possess  the  several 
qualities  indicated  in  the  preceding  chapter,  which  may  be 
concisely  summed  up  as  consisting  in  economy,  timeliness, 
intelligibility,  completeness,  unity  and  accuracy.  In  otheir 
words,  the  estimates  of  expenditure  should  be  carefulty 
framed,  and  kept  within  the  smallest  amount  consistent 
with  efficiency  ;  the  period  dealt  with  should  be  that  about 
to  commence  ;  the  arrangement  and  grouping  of  the  items 
should  be  logical  and  easily  followed  ;  the  full  amounts  to 
be  received  and  expended,  not  merely  the  probable  balances, 
should  appear ;  the  several  sections  should  be  brought 
together  and  treated  as  a  whole;  while  the  valuations 
should  be  real,  and  based  on  the  best  evidence  attainable. 

But  though  the  observance  of  these  rules  will  materially 
assist  the  deliberations  of  the  Chambers,  they  will  not  of 
themselves  suffice  to  secure  a  good  result.  The  parlia- 
mentary treatment  of  the  budget,  which  apparently  belongs 
to  the  subject  of  public,  and  especially  constitutional  law 
and  usage,  has  important  financial  bearings.  The  method 
by  which  expenses  and  taxes  are  voted  will  often  account 
for  the  good  or  bad  working  of  a  particular  system,  since 
the  checks  imposed  on  governmental  action  may  either  be 

U  u  2 


660  PUBLIC   FINANCE.  [BOOK  VI. 

insufficient  or  too  severe,  as  on  the  other  hand  the  legisla- 
ture may  be  too  careless  or  unduly  active  in  regulating 
financial  matters. 

§  2.  The  consideration  of  the  budget  is  one  of  the 
principal  tasks  of  a  legislative  session.  It  involves  the 
study  of  a  great  number  of  detailed  points  which  must 
occupy  a  good  deal  of  time,  and  in  certain  cases  may  give 
rise  to  keen  political  controversy.  The  way  in  which  it  is 
approached  will  have  something  to  do  with  the  merits  of 
the  final  result.  In  most  countries  the  ministerial  esti- 
mates are  submitted  to  a  preliminary  examination  by  a 
committee  supposed  to  be  specially  suited  for  the  work, 
and  this  body  reports  on — in  effect  very  often  re-casts — 
the  proposals  of  the  executive.  The  United  States  go  the 
farthest  in  this  direction  by  placing  the  initiative  in  the 
hands  of  distinct  committees.  The  financial  measures  in 
fact  come  from  the  legislature  itself,  though  they  are 
partly  conditioned  by  the  requirements  of  the  public  de- 
partments. A  consequence  is  the  loss  of  all  unity  of 
plan,  and  a  failure  in  almost  every  year  to  even  approach 
equilibrium x.  England  is  in  the  other  extreme :  the 
4  estimates '  and  the  proposed  annual  taxes  are  placed  at 
once  before  the  whole  House  sitting  as  a  committee,  and 
examined  without  any  previous  inquiry  2.  Ministerial  re- 
sponsibility is  thereby  increased,  as  the  measures  that 
make  up  the  ensemble  of  the  budget  are  altogether  the 
work  of  the  Cabinet,  whose  liability  is  undivided.  The 
committees  of  continental  countries,  though  they  appear 
to  secure  fuller  deliberation,  are  really  a  screen  for  the 
original  preparers  of  the  financial  proposals,  and  divide 
that  liability  which  should  be  definitely  fastened  on  the 
administration. 

Another  peculiarity  of  the  English  system  goes  far  to 
explain  its  general  economy,  viz.  the  ancient  rule  that  all 

1  Wilson,  Congressional  Government,  ch.  3. 

3  M.  Stourm  is  in  error  in  supposing  that  the  attendance  in  Committee  of 
Supply  is  smaller  than  in  the  case  of  ordinary  sittings.     Le  Btidget,  273. 


CHAP.  III.]  THE   VOTE   OF   THE   BUDGET.  66l 

proposals  for  expenditure  must  come  from  the  Crown,  i.  e. 
at  present  from  the  Ministry.  No  addition  can  be  made 
to  the  estimates  submitted,  and  anything  that  even  in- 
directly violates  this  rule  is  opposed  to  the  stricter  con- 
stitutional doctrine .V  All  expenditure  therefore  originates 
with  those  who  have  an  evident  interest  in  keeping  it 
within  bounds,  as  they  will  have  to  suggest  the  taxation 
required  to  meet  it.  A  stronger  check  on  the  natural 
tendency  towards  increased  expenditure  could  hardly  be 
devised,  and  it  is  at  once  curious  and  characteristic  that  it 
should  be  the  result  of  a  now  departed  condition  of 
things 2. 

The  evil  effect  of  the  absence  of  such  a  rule  is  seen  in 
the  increased  expenditure  often  proposed  by  the  French 
budgetary  commission,  and  also  in  the  Australian  colonies, 
where  though  the  limitation  exists  it  is  evaded  3.  It  is  par- 
ticularly noticeable  in  the  United  States,  where  members 
of  Congress  are  more  interested  in  securing  expenditure 
desired  by  their  constituents  than  in  maintaining  the 
character  of  the  national  Finances,  and  therefore  indulge 
in  the  operation  known  as  '  log-rolling,'  in  which  repre- 
sentatives agree  to  support  each  other's  schemes. 

§  3.  The  most  serious  constitutional  disputes  have  arisen 
respecting  the  rights  of  the  different  chambers  with  respect 
to  the  budget,  which,  however,  seem  to  have  a  very  slight 
financial  importance.  Usage  in  England  has  given  to  the 
Commons  what  is  practically  the  sole  power  in  this  depart- 
ment, but  in  other  countries  the  Upper  House  retains  the 
right  to  reject  or  amend  financial  legislation,  and  the 
American  Senate  extensively  avails  itself  of  this  privilege, 
chiefly  in  the  direction  of  increasing  the  appropriations  of 
4  the  House  '  for  the  public  service.  Regarded  as  a  ques- 

1  Todd,  Parliamentary  Government  in  England,  i.  690  sq. 

2  c  This  principle  is  commonly  involved  in  mediaeval  metaphysics  as  to  the 
prerogative  of  the  Crown,  but  it  is  as  useful  in  the  nineteenth  century  as  in  the 
fourteenth,   and   rests   on   as   sure   a  principle,'  Bagehot,  English   Constitu- 
tion, 146. 

a  Hearn,  Government  of  England,  378.     Cp.  Leroy  Beaulieu,  ii.  113. 


662  PUBLIC    FINANCE.  [BOOK  VI. 

tion  of  technique,  it  would  seem  that  if  the  two  Houses  are 
to  consider  the  budget  the  discussion  should  be  a  joint 
one,  as  otherwise  the  work  of  detailed  examination  has  to 
be  done  twice  over,  and  unless  there  is  some  restraining 
rule,  the  ultimate  outcome  will  be  greater  confusion  and 
less  conformity  to  any  settled  plan.  If  the  legislative 
authority  of  the  second  chamber  must  be  recognised,  it 
may  best  be  secured  by  confining  its  action  to  the  actual 
laws  necessary  for  validating  the  budget,  leaving  the  ex- 
amination of  the  separate  items  to  the  popular  house, 
where  they  are  first  presented. 

But  whether  the  discussion  be  principally  conducted  in 
one  House  or  separately  carried  on  in  each,  the  grouping  of 
the  several  heads  to  be  considered  deserves  attention.  In 
this  respect  the  general  course  of  progress  has  been  towards 
greater  specialization.  From  the  early  period  in  which  the 
supplies  were  voted  en  masse,  to  be  applied  at  the  ruler's 
will  to  the  public  services,  we  have  come  to  a  time  in 
which  the  separate  heads  may  be  numbered  by  hundreds. 
Thus  the  French  budget,  which  in  1831  had  only  164 
chapters,  has  been  steadily  subdivided  until  that  for  1890 
has  come  to  contain  807  ;  and  since  1831  each  chapter  has 
been  separately  voted 1.  The  English  Civil  Service  c  votes ' 
have  at  times  reached  150,  to  which  must  be  added  the 
smaller  number  for  the  Army  and  Navy.  A  thorough 
sifting  and  re-arrangement,  especially  of  the  former,  would 
be  a  great  improvement.  The  votes  for  each  civil  depart- 
ment might  be  taken  in  a  group,  with  further  discussion  of 
the  leading  items  by  a  grand  committee.  No  large  assem- 
bly can  possibly  control  each  of  the  branches  with  effect, 
though  its  criticisms  on  the  larger  heads  may  be  most 
useful.  It  is  even  possible  that  each  group  of  votes  might 
be  thoroughly  examined  by  a  separate  committee,  and  after- 
wards discussed  on  general  grounds  in  the  House  -, 

1  Stourm,  295. 

2  The  '  Committees '  of  the  American  system  have  this  advantage,  but  in 
their  case  there  is  no  real  unity. 


CHAP.  III.]  THE  VOTE  OF  THE   BUDGET.  663 

From  the  method  of  separate  votes  or  chapters,  together 
with  the  principle  of  legislative  control  follows,  the  rule  that 
no  transfer  can  take  place  from  one  vote  to  another.  A 
surplus  on  the  votes  for  justice  cannot  be  transferred  to 
meet  a  deficit  on  those  for  education,  or  vice  versa.  More- 
over, in  England  each  of  the  Civil  Service  votes  is  separate 
and  cannot  be  transferred,  while  those  for  the  Army  or 
Navy  may  be  used  for  other  votes  in  the  same  department, 
but  subject  to  re-examination  in  the  next  budget.  As  the 
votes  for  these  departments  are  few  in  number  and  the 
total  amount  is  usually  very  nearly  spent,  the  possibilities 
of  excessive  outlay  under  this  rule  are  not  great.  By  a 
better  arrangement  the  same  method  could  if  needed  be 
applied  in  other  departments,  but  the  rigid  limitation  to  the 
amount  voted  under  each  head  is  doubtless  a  check  on 
useless  expenditure.  A  reserve  fund,  to  be  employed  only 
on  the  responsibility  of  the  government,  and  to  be  re- 
placed in  the  next  financial  period,  is  perhaps  a  better 
arrangement,  as  it  draws  more  attention  to  over-expendi- 
ture l. 

§  4.  The  difficulty  of  exact  adjustment  and  the  occasional 
necessity  for  meeting  unexpected  demands  tend  to  impair 
that  unity  of  the  budget  which  is  one  of  its  good  qualities. 
In  the  actual  management  of  so  complicated  an  organiza- 
tion as  that  of  any  modern  State,  mistakes  in  calculation 
and  sudden  calls  that  no  prudence  could  anticipate  will 
from  time  to  time  occur.  English  usage  has  provided  the 
agency  of  {  supplementary  estimates,'  by  which  additional 
amounts  are  voted  to  meet  the  extra  requirements.  This 
process,  which  has  been  made  more  frequent  by  the  prompt 
closing  of  each  year's  accounts  and  the  stoppage  of  transfers, 
is  nevertheless,  according  to  competent  opinion,  *  one  of  the 
greatest  financial  evils.'  '  To  render  parliamentary  control 
effectual  it  is  necessary  that  the  House  of  Commons  should 
have  the  money  transactions  of  the  year  presented  to  it  in 

1  As  in  the  two  English  funds  of  the    '  Treasury  Chest '  and  '  Civil  Con- 
tingencies,' amounting  to  £1,300,000  and  £120,000  respectively. 


664  PUBLIC    FINANCE.  [BOOK  VI. 

one  mass  and  in  one  account  V  A  system  of  applying  for 
frequent  additional  votes  would  completely  destroy  the 
single  budget  or  at  least  deprive  it  of  any  value.  This 
expedient  should  therefore  be  confined  within  the  narrowest 
limits  consistent  with  efficiency,  and  such  is  the  established 
English  policy. 

In  some  cases,  however,  the  amount  required  may  exceed 
the  funds  at  the  disposal  of  the  government  or  be  wholly 
indefinite,  as  in  the  case  of  actual  or  threatened  war  when 
the  recognised  expedient  is  a  'vote  of  credit,'  which 
amounts  to  an  authorization  of  expenditure  and  secures  the 
control  of  Parliament,  though  it  breaks  the  unity  of  the 
budget,  but  in  the  least  dangerous  way.  The  technical 
rules  of  financial  management  ought  to  be  sufficiently 
flexible  to  meet  such  emergencies,  and  a  special  vote  at 
once  satisfies  this  condition  while  it  indicates  that  the  pro- 
ceeding is  irregular  and  exceptional. 

In  other  countries  a  like  restraint  has  not  been  observed. 
'As  regularly  as  the  annual  session  opens  there  is  a 
Deficiency  Bill  to  be  considered '  is  what  we  hear  from  the 
United  States  2.  The  additional  credits  in  France  for  the 
seven  years  1879-85  came  to  £66,200,000,  or,  deducting 
savings  on  other  heads,  to  £43.400,000,  an  average  net 
excess  of  £6,200,000  3.  Belgium,  Prussia  and  Italy,  under 
the  form  of  a  qualifying  budget,  also  transgress  the  normal 
bounds  of  additional  votes.  It  would  seem  that  a  long 
constitutional  discipline  is  needed  to  secure  due  attention 
to  this  point  as  well  as  a  proper  budgetary  system.  The 
unity  of  the  budget  may  apparently  be  infringed  in  another 
way.  It  might  seem  that  all  the  expenditure  and  revenue 
should  be  annually  voted  in  order  to  preserve  complete 
legislative  control.  In  fact,  however,  this  course  is  neither 
necessary  nor  desirable.  So  long  as  a  substantial  part  of 

1  Gladstone,  quoted  by  Todd,  Parliamentary  Government,  i.  740-2. 

2  Wilson,  Congressional  Government,  159. 

3  Stourm,   369-70.     His  figures  do  not  quite  agree  with  those  given  by 
Leroy  Beaulieu,  ii.  104. 


CHAP.  III.]  THE  VOTE   OF  THE   BUDGET.  665 

the  outlay  is  subject  to  the  discretion  of  Parliament  and 
the  mode  of  paying  out  the  funds  is  under  strict  legal 
arrangement,  there  is  no  danger  in  making  permanent 
provision  for  the  greater  bulk  of  the  public  demands. 
Certain  heads  of  expenditure — particularly  the  interest  on 
debt  and  the  salaries  of  the  judiciary — are  best  removed 
from  the  field  of  party  disputes.  The  general  revenue 
system  will  not  be  annually  changed,  and  it  can  be  most 
conveniently  fixed  by  permanent  legislation.  Such  is  the 
rationale  of  the  English  '  Consolidated  Fund,'  into  which 
by  far  the  largest  part  of  the  revenue  comes  by  virtue  of 
permanent  Acts  and  out  of  which  one-third  of  the  annual 
expenditure  is  drawn  by  the  same  authority. 

This  distinction  between  '  permanent '  and  '  annual ' 
outlay  and  income  is  useful  in  more  ways  than  one.  It 
reduces  the  already  too  heavy  work  of  voting  supplies, 
which  might  indeed  be  further  reduced  by  placing  all 
absolutely  needful  expenditure  on  the  Consolidated  Fund. 
It  also  helps  to  separate  the  stable  from  the  moveable 
taxes.  The  income-tax  performs,  as  we  have  more  than 
once  stated,  a  useful  function  in  supplying  unexpected 
demands,  and  it  is  therefore  rightly  an  annual  tax  of  vary- 
ing amount.  So,  too,  are  some  of  the  customs,  e.g.  the  tea 
duty.  The  separation  between  the  two  classes  of  taxes 
might  be  even  more  strongly  emphasized,  though  the 
position  of  the  income-tax  is  probably  sufficient  for  the 
purpose.  There  is  besides  an  advantage  in  retaining  the 
greater  part  of  the  public  expenditure  under  the  annual 
scrutiny  of  Parliament,  so  that  until  an  item  is  unquestion- 
able and  its  amount  very  definitely  settled,  it  should  not 
be  transferred  to  the  '  Consolidated  Fund '  charges. 

For  a  very  different  reason  the  German  military  ex- 
penditure is  voted  for  a  period  of  seven  years  and  is  there- 
fore removed  from  annual  debate,  by  which  arrangement 
the  Imperial  government  is  relieved  from  dependence  on  the 
Reichstag.  Some  of  the  smaller  German  States  have 
biennial  or  even  (as  in  Hesse)  triennial  budgets,  an  im- 


666  PUBLIC   FINANCE.  [BOOK  VI. 

possible  system  in  any  country  with  active  constitutional 
life,  and  one  which  will  be  abandoned  when  the  popular 
element  becomes  stronger. 

The  permanent  settlement  of  some  sections  of  income 
and  expenditure  does  not  really  infringe  on  the  principle  of 
unity.  For  England  the  annual  financial  statement — '  the 
Budget'  in  the  English  sense — brings  together  all  the 
heads  of  expense  and  receipt  as  well  as  the  movement  of 
the  national  debt.  The  Consolidated  Fund  charges  are 
definitely  known  and  the  estimates  supply  information  as 
to  the  remaining  expenditure.  The  votes  in  committee 
either  of  *  supply '  or  '  ways  and  means '  give  the  basis  for 
the  budgetary  legislation  of  the  year,  which  is  in  a  sense 
supplementary  to  the  existing  laws,  and  combined  with 
them,  makes  up  'the  budget'  in  the  wider  use  of  the  term1. 

In  other  countries  the  adaptation  of  the  English  system 
has  led  to  a  greater  formal  strictness  and  a  stronger  em- 
phasis on  '  the  law  of  the  Budget.'  Convention  and  usage 
have  however,  been  on  the  whole  more  successful  in  keeping 
up  a  high  standard  than  definite  constitutional  enactments, 
as  a  comparison  of  English  with  continental  Finance  will 
amply  prove. 

§  5.  The  general  efficiency  of  English  financial  manage- 
ment is  largely  due  to  a  feature  of  its  budgetary  system 
already  referred  to  ;  viz.  that  which  prescribes  the  closing 
of  accounts  at  the  end  of  each  financial  year.  Only  the 
actual  money  paid  out  is  included  in  the  expenses :  all 
balances  on  votes  lapse  on  each  3ist  of  March,  and  if 
required  must  be  voted  afresh.  Only  the  tax  receipts  are 
credited  to  the  year ;  unpaid  arrears  going  to  the  next 
budget.  This  system  secures  an  accuracy  in  the  accounts 
and  a  facility  in  presenting  them  which  makes  their  speedy 
presentation  at  the  end  of  each  year  a  feasible  measure. 
The  consequence  is  that  in  his  financial  statement  the 
Chancellor  of  the  Exchequer  is  able  to  deal  with  the 

1  Thus  the  tedious  process  of '  supply,'  calculated  to  take  thirty-five  working 
days  of  the  session,  is,  in  the  French  sense,  a  part  of  the  budget. 


CHAP.  III.]  THE   VOTE   OF   THE   BUDGET.  667 

results  of  the  year  just  closed  or  closing  and  the  prospects 
of  the  opening  one.  The  position  of  the  Finances  is 
distinctly  known  at  the  end  of  the  year,  and  no  need  for 
amended  returns  can  arise. 

The  French  method,  in  which  the  financial  year  is 
invested  with  a  kind  of  personality,  and  its  arrears  of 
receipt  and  expense  come  to  its  account  at  any  later  time, 
has  an  appearance  of  completeness,  since  it  assigns  to  a 
given  period  all  the  consequences  due  to  it.  Delays  in 
collecting  taxes  or  postponement  of  expenditure  may  affect 
the  English  accounts 1,  but  by  separating  to  each  year 
what  is  really  to  be  attributed  to  it  this  danger  is  avoided. 
On  the  other  hand  there  is  the  fatal  objection  of  delay. 
To  make  criticism  valuable  it  must  be  speedy.  The  French 
budget  of  1 880  could  hardly  excite  much  interest  in  March, 
1883 — the  date  of  the  presentation  of  the  final  law  re- 
lating to  it — when  the  Chamber  would  be  more  engaged  by 
that  of  1884  which  had  been  just  laid  before  it  for  the  first 
time.  It  is  hopeless  to  expect  that  long  past  transactions 
will  be  carefully  examined,  and  therefore  the  adoption  of  a 
quick,  even  if  less  precise,  method  is  by  far  the  best.  But 
the  superior  accuracy  of  the  French  system  is  more  than 
doubtful.  The  arrears  both  of  expense  and  income  will 
normally  be  about  the  same  from  one  year  to  another,  so 
that  what  is  lost  at  the  opening  will  be  made  up  at  the 
close.  Besides,  it  must  be  remembered  that  the  arrears  are 
at  best  a  small  part  of  the  total  amounts  2.  To  gain  some- 
what greater  precision  in  the  small  balance  of  a  small 
proportion,  the  whole  mass  of  accounts  is  surrounded  by 

1  Peel,  for  example,  miscalculated  the  yield  of  the  income-tax  for  1842  by 
not  taking  into  account  the  fact  that  only  one-half  of  the  tax  would  come  in 
during  the  financial  year.     Northcote,  Financial  Policy,  41.     Mr.  Lowe  in- 
creased some  of  his  surpluses  by  manipulating  the  collection  of  the  income- 
tax.     More  generally,  there  is  no  doubt  that  a  surplus  could  be  manufactured 
by  starving  the  permanent  part  of  the  public  services  and  throwing  the  additional 
cost  of  replacement  on  succeeding  years. 

2  In  France,  for  each  of  the  years  1883,  1884,  1885,  the  uncollected  receipts 
were  about  2|  per  cent.,  and  the  unpaid  expenditure  n  per  cent,  of  the  total 
figures.     Stourm,  123-4. 


668  PUBLIC   FINANCE.  [BOOK  VI. 

the  obscurity  that  lapse  of  time  must  produce.  Accord- 
ingly we  are  not  surprised  to  find  that  Italy  and  Germany 
have  on  this  point  followed  England  rather  than  France. 

§  6.  From  the  legislative  methods  of  dealing  with  the 
financial  condition,  we  have  now  to  pass  to  the  regulations 
under  which  the  outlay  of  public  funds  is  authorized  and 
verified.  The  most  admirable  provisions  respecting  the 
preparation  and  vote  of  the  budget  will  be  useless  unless 
there  is  adequate  machinery  to  secure  conformity  to  the 
determinations  of  the  Legislature.  The  mechanism  by 
which  the  revenues  are  drawn  from  the  contributors  to  the 
Treasury  of  the  State  has  been  already  noticed1 ;  it  remains 
to  see  how  the  collected  public  income  is  applied  to  the 
proper  objects.  The  supervision  of  issues  in  England 
originally  belonged  to  the  Exchequer,  which  kept  a  careful 
but  rather  clumsy  system  in  operation.  With  the  growth 
of  expenditure  and  income  its  methods  proved  defective. 
The  accounts  were  many  years  in  arrears,  and  a  great  deal 
of  the  expenditure  was  misapplied.  The  final  audit  of 
accounts  was  in  a  still  more  backward  condition,  and  large 
sums  were  held  by  the  Exchequer  officials,  while  the  dif- 
ferent spending  departments  had  unapplied  balances  in 
their  possession.  The  first  reforms  of  this  evil  were  pre- 
pared by  Burke,  and  carried  into  effect  by  Pitt  in  1785 
when  he  created  the  Board  of  Audit2. 

Fresh  abuses  could  not  fail  to  arise  during  the  long  war 
period,  and  these  in  turn  led  to  the  reforms  by  which  the 
Exchequer  as  a  substantive  institution  was  abolished  and 
a  better  system  of  accounts  adopted  y.  Various  committees 
of  inquiry  disclosed  further  weaknesses  in  the  machinery 
of  control  and  audit,  particularly  in  the  influence  of  Par- 
liament over  the  testing  of  the  accounts.  The  final  reforms 
consisted  in  the  appointment  of  the  Committee  of  Public 

1  Bk.  vi.  ch.  2.  §§  5,  6. 

2  Cp.  Burke's  great  speech  on  '  Economical  Reform '  particularly,  Works,  ii. 
81  sq. 

3  Sir  H.  Parnell  vigorously  attacked  the  methods  of  control  existing  when 
he  wrote  (1830),  Financial  Reform ,  ch.  n. 


CHAP.  III.]  CONTROL   AND   AUDIT.  669 

Accounts  (1862),  and  in  the  combination  of  Control  and 
Audit  in  1866  by  the  appointment  of  a  Comptroller  and 
Auditor-General  \ 

The  system  in  use  at  present  affords  valuable  guarantees 
for  the  legal  issue  and  due  application  of  the  revenue  that 
the  earning  departments  bring  into  the  treasury,  i.e. 
the  Bank  of  England,  where  it  lies  to  the  account  of  the 
Comptroller  and  Auditor-General.  For  every  payment 
there  must  be  the  following  steps :  (i)  a  requisition  by  the 
Treasury  to  the  Comptroller-General  having  as  its  ground 
an  Act  of  Parliament ;  (2)  a  grant  of  credit  by  the  Comp- 
troller-General, who  is  bound  to  satisfy  himself  as  to  its 
accordance  with  the  terms  of  the  law  on  the  faith  of  which 
it  is  issued,  and  which  lasts  only  for  the  current  year ;  (3)  a 
treasury  order  to  the  Bank  to  transfer  the  specified  sum 
from  the  Comptroller's  account  to  that  of  the  Paymaster- 
General  for  the  particular  service.  There  must  therefore 
be  the  clearest  legal  sanction  for  both  the  object  and 
amount  of  every  grant.  The  Bank  of  England  is  the 
sole  receptacle  for  the  collected  revenue,  and  the  Comp- 
troller-General's order  the  only  key  that  unlocks  its 
coffers  2. 

In  France  the  terms  of  disbursement  are  affected  by 
the  existence  of  the  subordinate  local  treasuries,  from  which 
payments  are  made,  and  whose  heads  profit  by  the  public 
funds  that  they  hold.  The  responsibility  for  grants  rests 
on  the  particular  department  requiring  them  and  on  the 
Ministry  of  Finance  ;  but  though  a  number  of  distinguished 
financiers  have  laboured  to  make  the  system  of  control 
effectual  \  it  is  as  yet  defective  in  the  absence  of  any  ex- 
ternal preventive  authority  over  issues. 

1  The  occasional  '  committees  on  Finance '  became  the  annual  Committee  of 
Accounts  in  1862.  The  Act  reorganizing  the  control  and  audit  department 
was  29  &  30  Viet.  c.  39. 

a  The  Bank  of  England  by  its  management  of  the  debt  and  its  practical 
custody  of  the  revenue  is,  in  a  sense,  a  government  bank,  but  not  a  state  one. 
Cp.  Bk.  ii.  ch.  4.  §  2. 

3  Mollien,  Baron  Louis,  and  Audriffet  may  be  mentioned. 


670  PUBLIC   FINANCE.  [BOOK  VI. 

The  Italian  system  has  here  followed  the  English  one  by 
requiring  an  authorization  from  the  '  Court  of  Accounts ' 
before  any  payments  can  be  made  from  the  Treasury l ; 
and  the  Prussian  *  Curators  of  the  Treasury '  discharge  a 
like  function  in  that  country. 

§  7.  Distinct  from  the  control  over  issue  and  quite  as 
necessary  is  the  audit  of  accounts.  There  is  little  advan- 
tage in  preventing  unauthorized  payments  to  departments 
if  they  afterwards  misapply  the  funds  received  for  specific 
purposes.  To  guard  against  this  danger  another  duty  has 
been  placed  on  the  Comptroller  and  Auditor-General,  who 
in  this  second  capacity  is  bound  to  discharge  the  duties  of 
the  Board  of  Audit  whose  place  he  has  taken,  as  it  super- 
seded the  inefficient  audit  of  the  ancient  Exchequer.  The 
work  consists  of  two  distinct  parts:  viz.  (i)  the  verification 
of  the  accounts  in  order  to  see  that  no  improper  expendi- 
ture in  the  ordinary  sense  has  been  incurred  ;  and  (2)  the 
appropriation  audit,  which  inquires  into  the  application  of 
the  funds  and  its  conformity  with  the  directions  of  Parlia- 
ment. 

This  latter  check,  first  applied  to  the  navy  expenses  in 
1832,  was  extended  to  the  army  accounts  in  1846,  and 
became  general  in  1866  2.  The  Auditor-General  is  bound 
within  a  limited  period  to  report  to  Parliament  on  the 
results  of  his  inquiry,  noting  any  irregularities  that  he  has 
discovered,  and  as  a  final  barrier  to  misappropriation  the 
Committee  of  Public  Accounts  goes  over  the  expenditure 
again  in  a  close  and  critical  manner.  Under  such  con- 
ditions no  great  departure  from  the  line  of  expenditure 
marked  out  by  the  budget  can  escape  notice,  though  petty 
errors  and  small  illegal  payments  are  not  unknown.  The 
weakest  points  of  the  system  are  (i)  the  fact  that  the 
Auditor-General  is  only  an  administrative  official,  and  (2) 
the  absence  of  any  sufficient  sanction  to  support  the  rulings 
of  the  auditing  bodies,  who  can  only  report  to  Parliament 

1  So  have  also  Belgium  and  Holland. 

2  Todd,  Parliamentary  Government ,  ii.  57  sq. 


CHAP.  III.]  CONTROL   AND   AUDIT.  67! 

the   outcome  of  their   investigations  and  the  errors  that 
they  have  discovered. 

The  United  States  Congress  had  long  preceded  England 
in  this  line  by  appointing  in  1814  a  Committee  on  Public 
Expenditure,  to  which  other  committees  for  separate  de- 
partments were  from  time  to  time  added.  Owing  to  in- 
efficient book-keeping  and  the  undue  extension  of  credits 
the  detection  of  erroneous  applications  of  funds  was  not 
easy,  and  a  good  deal  of  entirely  illegal  expenditure  escaped 
notice.  The  absence  of  unity  in  the  financial  administra- 
tion shows  its  effects  even  in  this  apparently  mechanical 
part  of  the  system,  by  complicating  the  forms  of  the  public 
accounts  1. 

The  control  of  the  Finances  in  France  is  assigned  to  an 
independent  body,  the  Cour  des  Comptes,  which  ex- 
amines the  accounts  judicially,  and  also  reports  to  the 
legislature  on  any  infractions  of  the  law  of  the  budget. 
The  former  power  was  bestowed  on  it  by  Napoleon  I  at 
its  creation  in  1807;  the  latter  was  given  in  1831.  The 
two  functions  broadly  correspond  to  the  two  duties  of  the 
Comptroller  and  Auditor-General,  but  the  French  court 
differs  in  being  a  judicial  body,  not  an  administrative 
official,  though  its  independence  is  perhaps  less  solidly 
guaranteed.  When  combined  with  the  internal  audits  of 
the  several  ministries  and  the  legislative  control  that  the 
final  law  of  the  budget  gives  to  the  assembly,  it  would  seem 
that  the  mechanism  of  the  French  system  is  hardly  sus- 
ceptible of  much  substantial  improvement 2. 

Other  continental  countries  have  followed  the  French 
model,  but  with  certain  useful  modifications  due  to  English 
example.  The  Prussian  '  Court  of  Accounts '  holds  in- 
quiries on  the  spot  and  is  not  limited  (as  in  France)  to  the 
examination  of  documents  submitted  to  it.  The  position 
of  its  President  nearly  resembles  that  of  the  Auditor- 

1  Wilson,  Congressional  Government,  175;   also  Bolles,  Financial  History 
(1861-1885),  523  sq. 
8  Stourm,  Le  Budget,  chs.  28  &  29. 


672  PUBLIC   FINANCE. 

General,  and  its  procedure  is  often  administrative.  Several 
countries  give  their  'Courts  of  Account '  a  preventive  control 
over  issues  of  money  and  greater  latitude  in  dealing  with 
cases  Such  variations  do  not  at  all  affect  the  general  truth 
that  the  conditions  of  a  proper  audit  have  been  established 
in  all  civilized  countries,  and  only  require  the  existence  of  a 
sound  constitutional  sentiment  in  the  legislature  to  make 
them  effective. 

§  8.  With  the  verification  of  the  public  accounts  and  the 
establishment  of  their  conformity  to  the  law  concludes  the 
cycle  of  processes  relating  to  a  financial  period.  In  this 
and  the  preceding  chapter  we  have  shortly  noted  the  work- 
ing of  the  financial  machine  without  entering  into  questions 
of  constitutional  law  or  administrative  practice,  and  regard- 
ing simply  its  effect  in  securing  the  best  application  of 
revenue  to  expenditure.  It  but  remains  to  again  lay  em- 
phasis on  the  fact  that  good  Finance  cannot  be  attained 
without  intelligent  care  on  the  part  of  the  citizens.  The 
rules  of  budgetary  legislation  are  serviceable  in  keeping 
administration  within  limits;  but  prudent  expenditure, 
productive  and  equitable  taxation,  and  due  equilibrium 
between  income  and  outlay  will  only  be  found  where 
responsibility  is  enforced  by  the  public  opinion  of  an 
active  and  enlightened  community. 


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